Sizing Up Oil's Geopolitical Risk

 | Jun 12, 2014 | 2:28 PM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:




Two very big stories this week require that I address both briefly. First, Iraq. 

While it is incredibly disheartening to see Mosul fall so quickly to a very small, very extreme group of Islamic militants, especially considering the tragic loss of life, limb and resources this country expended in the last 10 years, it is also likely to have little immediate effect on the oil markets.

Yes, there will be the standard rally of crude prices based on the risks of reduced production going forward, as we have seen in the Egypt, Syria and Libya squabbles, but there is rather little risk of much reduced production in the near term. Let's examine:

The group calling themselves the Iraq/Syria Islamic state (ISIS) is an extreme Sunni group of insurgents with little popular Iraqi support. The cities that they have so spectacularly claimed are in diverse areas of religious populations. This implies that the success that they have gained could only occur in those deeply divided regions such as Mosul and Tikrit.

The vast majority of Iraq's 3.5 million barrels a day oil production lies in the South, amid the extreme Shiite majority, while only 17% of production remains in the north, with by far the largest center being the Kirkuk "superfield" nearer the border to Turkey -- that 600,000-barrel-a-day field is located in an area of superior Kurdish majorities. Both areas are highly unlikely to suffer a similar fate as Mosul, should the ISIS troops attempt a raid there.

What is a very sharp risk from these latest events in Iraq is a continued destabilization of the Al-Maliki government and its economic progress. In the global oil market, the 3.5 million barrels of production from Iraq had become a critically needed supply source. Moreover, OPEC and even global oil markets were counting on the potential for continued production growth from Iraq, with hopes of 5 million or even 6 million barrels a day of production in the next several years. The risk of threatened new production growth is the real threat to global oil prices.

And it is here that we have to wait and see just how long and how far the destabilization gets. Is Iraq descending into a full-scale civil war? I certainly doubt it. I even doubt that this small group of rebels can continue to hold the towns they have recently taken. But the prospect of continued violence in Iraq will certainly lessen the appetite of Western oil companies to invest in new production infrastructure in Iraq. And that is where the price of oil is at risk of seeing $130 in 2015.

And that's precisely what I think is going to happen.

Now, quickly to Anadarko (APC), a stock I was an advocate of in March, only weeks before the Tronox settlement saw shares explode. Recent options activity in the shares was accompanied by a rumor that Exxon Mobil (XOM) was sizing up Anadarko for a takeover bid. It's not going to happen.

But it doesn't have to. I liked Anadarko before the settlement, and I like it still after it. It still has the best asset mix in the patch, and it is still undervalued compared with its peers, I said in March that Anadarko was worth $130 without the overhang of Tronox.

I still believe that and still am holding shares.

Columnist Conversations

View Chart »  View in New Window » View Chart » 
Hug declines in Advance Auto Parts (AAP) and Dick's Sporting Goods (DKS) made for great chances to buy stock a...
Pepsi is trading at new all time highs today. The stock is up 0.7% and is taking out major resistance near the...
FIBOCALL: AAP down 22% "FIBOCALL: AAP opens much lower today. We took a look way back to see where support ...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.