Crude Rallies On Iraq Conflict: Oil Stocks In Focus - Analyst Blog

Oil prices rose to their highest level in nearly nine months on Thursday, as tensions over Iraq continued to feed supply concerns in the Middle East. In New York, West Texas crude was up 2% to close at $106.53 per barrel, rising above the $106 threshold for the first time since Sep 2013.

The Trouble

Since Tuesday, the al-Qaeda connected Sunni militant group – the Islamic State in Iraq and Syria ISIS – has captured three key towns in northern Iraq: Mosul - the country's second-largest city, Tikrit, and Baiji - where Iraq's biggest oil refinery is located. What's more, the insurgents, who want to establish their own state in Iraq and Syria, are reportedly pushing toward the capital city of Baghdad.

Worryingly, the Iraqi security has been weak in the face of these attacks and ineffective in maintaining order. In fact, officials said that forces from Iraq's autonomous Kurdish region took control of the northern oil hub of Kirkuk to protect it from jihadist attack after  government's  troops  failed  to  secure  the  area  and  abandoned  their  posts.

Country's Economic Turnaround at Stake?

Just when things were starting to look up from decades of instability, the stunning advance of the Sunni militants threatens to plunge Iraq back into a state of violence and chaos. This not only disrupts the country's budding economic growth – during which it became the second-largest oil producer in OPEC after Saudi Arabia – but also poses the risk of disintegration for the fragile nation.     

Impact on Crude Prices

Till now, the uprising is limited to the northern part of the country, while Iraq's production region in the south remains largely unscathed. However, there are fears that the instability could eventually move to the southern part, where most of Iraq's oilfields and export facilities are located.     

Predictably, the threat to oil supplies from a major producer has impacted prices in a big way.

The Stakeholders

The rebound in Iraq's crude production has happened with the help of international oil companies including BP plc BP, Exxon Mobil Corp. XOM, Royal Dutch Shell plc (RDS.A) and Chevron Corp. CVX. Though Iraq operations make up only a small portion of these majors' global output, exploration and development has been ongoing.

Let's take a closer look at how the big energy companies are exposed to Iraq:

British major BP has a 38% working interest in the flagship Rumaila oilfield in southern Iraq. Counted as one of the top five oilfields in the world, Rumaila is estimated to hold reserves of nearly 18 billion barrels and currently produces the majority of Iraq's total daily output of around 3.5 million barrels. However, BP's share of output from Iraq is immaterial to its total daily production of more than 2 million barrels.

U.S. behemoth Exxon Mobil has roughly 900,000 acres of onshore leasehold land in Iraq. The company also possesses development wells in the country's West Qurna field, another big facility that holds approximately half the proved reserves of Rumaila. Exxon Mobil, which sold all but 25% of its stake in the field to Chinese energy giant PetroChina Co. Ltd. PTR and Indonesia's Pertamina in 2013, gets paid $1.90 per barrel for each one it produces above 244,000 barrels a day.

Europe's largest oil company Royal Dutch Shell holds a 45% operated interest in the giant Majnoon field, located in Basra province in Southern Iraq. With about 12.6 billion barrels in proved reserves, production was restarted from the oilfield in September last year. Volumes averaged 210,000 barrels a day, when Shell achieved first shipment from the development in Apr.

Chevron – the second-largest U.S. oil company by market value after Exxon Mobil – holds an 80% operated interest in the development-stage Qara Dagh block in Kurdistan region of Iraq. However, due to its involvement with the Kurdish regional government, Chevron has been barred from bidding on projects in the rest of Iraq

The Verdict

In the short run, higher oil prices over the Iraqi crisis will benefit the upstream divisions of BP, Exxon Mobil, Shell and Chevron. But in the long run, if the conflict escalates and crude keeps on climbing, at some point the overall economic activity will be hurt, which can't be good news even for the biggies. Moreover, escalating tensions in Iraq will mean lost opportunities in the region, and eventually a setback to their growth prospects.

Considering the uncertainties associated with the abovementioned Zacks Rank #3 (Hold) stocks, we advise investors to play safe and wait for a better entry point before accumulating shares.
 

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