This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Why Oil Isn't Spiking as Militant Group Tears Apart Iraq

NEW YORK (TheStreet) -- There's a premium in crude oil markets since violence in Iraq escalated the middle of last week, but fear is likely to remain absent from the trade unless a significant change in the altercation on one side or the other.

Islamist militant group ISIS (for Islamic State in Iraq and Syria) has seized a large portion of Iraq's northern territory and claims control of some part of Syria, but analysts said their hostilities don't yet threaten Iraq's oil-rich southern region. Additionally, ISIS militants haven't sabotaged northern oil fields.

WATCH: More market update videos on TheStreet TV | More videos from Joe Deaux

"It still doesn't matter; psychology is what dominates the market at this point," Dennis Gartman, editor of The Gartman Letter, said in a phone interview.

Since June 12 when crude spiked on news of widespread attacks by ISIS, West Texas Intermediate crude oil is up about 2.3% and Brent crude is higher by 3.2%. But the largest portion of those gains occurred during one trading day.

Crude prices haven't spiked further for a couple of reasons. Where most of the fighting last week in northern Iraq transpired, production and exports of Iraqi crude there have been shut down since early March, when rebels bombed a pipeline to Turkey.

"In short, the 250 kilobarrels of Kirkuk oil exports that would have otherwise been most immediately at risk last week was lost months ago, and the oil markets had already adjusted," Michael Wittner, oil and products analyst at Societe Generale, wrote Monday in a note to investors.

The other reason oil prices haven't spiked more is because the major oil producing regions in southern Iraq -- namely the city of Basrah -- remain untouched and as of the moment unthreatened.

"The oil is a reasonably long way from where this particular action is taking place," John Browne, former BP (BP - Get Report) CEO said in an interview. "There isn't a sense of panic, and I don't think there should be a sense of panic because there is a reasonable amount of oil to go around."

Should ISIS create a stronghold in territories it currently occupies and choose not to march to Baghdad and the southern areas of the country, prices aren't likely to spike higher.

Bank of America Merrill Lynch suggests the "highly unlikely" scenario that ISIS temporarily enters the capital, Brent crude could jump by another $10 to $15 a barrel from the current price of about $112. The worst case scenario, the bank writes in a note to investors, would be if ISIS disrupts some 2.6 million barrels a day of Iraqi production (the country averages 3.2 million), which would trigger a $40 to $50 jump.

A massive price jump like that would come on the back of much more aggressive action by the militant group into Baghdad and major oil-producing cities, and it assumes ISIS would choose to cut off production, which it hasn't yet done to northern pipelines.

Current market action in Brent and WTI show the increased Iraq violence priced in, but an ISIS surge further in the country or military action by the United States (President Obama is considering possible airstrikes) or neighboring Iran could add greater price volatility.

ISIS previously has stated that its goal is to establish an Islamic Caliphate from eastern Syria to central Iraq -- an area very close to what it currently occupies.

While there is very real uncertainty as to what happens next, ISIS is a well-trained militant group that may not be targeting shutting down the country's oil infrastructure. Additionally, ISIS opposition will also come from within the country, including the ethnic Kurds.

"I think they're wise enough to know not to do that," Gartman said. "They also know: don't f*** with the Kurds."

-- Written by Joe Deaux in New York.

>Contact by Email.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BP $35.96 0.00%
CVX $89.57 0.00%
HES $61.91 0.00%
RDS.A $55.27 0.00%
XOM $79.26 0.00%


Chart of I:DJI
DOW 17,084.49 +33.74 0.20%
S&P 500 2,014.89 +15.91 0.80%
NASDAQ 4,830.47 +19.6820 0.41%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs