Iraq conflict drives up oil, puts stocks on pause

Investors should watch for hints of inflation, which could further shake a stimulus-addicted market.

By InvestorPlace Jun 13, 2014 6:35PM

Soldier in IraqBy Anthony Mirhaydari, InvestorPlace

The complacency and calm that had lulled investors into a dreamlike state has been shattered, replaced by surging oil prices and horrific scenes out of northern Iraq.

A Sunni terrorist group known as the Islamic State in Iraq and the Levant (ISIL, or ISIS, depending on translation) -- which could actually be considered a small army at this point -- continues its push toward Baghdad and is nearing key oil production and refining facilities.

As a result, stocks suffered their worst weekly decline in two months as gold and oil prices surged in response. Traders are jumpy, as evidenced by a down-and-up churn near the closing bell on Friday related to rumors that Iraqi Prime Minister Nouri al-Maliki had been killed.

With the situation on the ground in Iraq deteriorating fast, more market volatility is likely heading into next week's Federal Reserve policy meeting. Here's why:

ISIS has already taken Mosul, Iraq's second largest city, and captured tanks, helicopters and other equipment as well as hundreds of millions of dollars from a central bank branch there. The Kurds in northern Iraq have taken Kirkuk and its oil field. And the country's Shiites are calling for Iranian allies to help.

Driven by this conflagration, wholesale gasoline prices have surged to levels not seen since 2013 and are now just 10% from the all-time highs hit in 2011 and 2012.

Further increases look likely before this is all done.

The large Baiji oil refinery in northern Iraq, with a 310,000 barrel per day capacity, is reportedly still under government control. And the large Iraq-Turkey oil pipeline (ITP) that runs north has been shut for maintenance since March and hasn't been damaged.

But should ISIS take Baiji (protected by Iraqi special forces at the moment) or destroy or damage the ITP, oil and gasoline prices could shoot much higher. There's another large oil refinery, the Daura facility, in the disputed region with a capacity of 300,000 barrels per day.

Overall in April, Iraq produced 3.34 million barrels per day vs. a sustainable production capacity of 3.65 million barrels, according to Deutsche Bank.

It's worth remembering that a similar geopolitically driven rise in energy prices in 2011, caused by the Arab Spring uprising in Libya and elsewhere, resulted in a spike in inflation that forced the Fed to end its "QE2" bond buying program. The pullback in stimulus ushered in a tumultuous summer of trading that year that ended that August with the most violent correction of the bull market thus far.

Watch for comments about the upward drift in inflation in the Fed's policy announcement next week. Any hint that price pressures could force a sooner-than-expected short-term interest-rate hike could really rattle this stimulus-addicted market.

For now, I continue to recommend investors remain cautious with a focus on the safe-haven and inflation-production qualities of precious metals and the related mining stocks. NovaGold (NG) is up more than 18% since I added it to my Edge Sample Portfolio back on June 5.

More from InvestorPlace

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he had recommended NG to his clients.
Jun 14, 2014 11:39PM
The big market churners are just rubbing their hands together in excitement nothing quite like a little volitility.
Jun 14, 2014 11:55AM

Sagely advice; there ARE similarities with the 2011 Libya uprisings.  Iraq could be divided up, or if it remains intact we will see Iran benefiting from the increased influence,  There's really little we can do either, since I can't see our men fighting side by side with the Quds forces.

None of this will calm the financial markets 

Jun 15, 2014 8:08PM
I don't worry about gas prices anymore.  My Toyota sits at the dealer so much getting warranty work done that I hardly buy any gas.  My bus pass hasnt gone up in price.  Maybe I should just dump the Toyota for a bus?
Jun 16, 2014 11:18AM
Nothing like a good old religious war to fuel the volatility of capitalism.  They, Sunnis and Shiites, have been warring over Ali for 1500 years and no capitalists or socialists are going to stop them. Let's sell them enough arms so they can get rid of all of each side.
Jun 18, 2014 2:06AM
Fire up that war machine and Send in the troops!
We must protect the profits and interests of the big oil corporations at all costs!
Alert the Army, Navy, Air Force, Marines and deploy the National Guard!
We need boots on the ground and fast! 
Every American family must make sacrifices! No sacrifice is too great for your corporation!
Those corporate profits depend on us all!

Be patriotic and force your children to serve in the military instead of going to college.
We need soldiers, not engineers and doctors!
Without record high corporate profits we have nothing, we must save those profits at all costs!

Better buy your flags quick before the prices go up!
Buy extras just in case!


Jun 16, 2014 9:30AM
"Driven by this conflagration, wholesale gasoline prices have surged to levels not seen since 2013 and are now just 10% from the all-time highs hit in 2011 and 2012."

Yet America continues to export higher amounts of finished Crude products. There is plenty of Crude Globally, what does or doesn't happen in Iraq won't change that. It's just another opportunity for Big Oil, whether here or there, to gouge consumers.
Jun 16, 2014 8:24AM
The likely FED fumble today... LIE about jobs and recovery. Agree to keep tapering but hold rates down. Behind the scene... pump fake money to banks faster than ever and keep dead inherited business platforms that do us no good-- looking plump. 
What the FED SHOULD BE DOING... cut off funds to the Treasury and our big banks. Call in all the bank-held Notes on their own debt. FUND as many small enterprises as possible by managing activity, not prosperity (the cream will rise, the inept will be cut off). Raise the Commercial borrowing rate to 150% so that ZERO dollars go to a business platform. See those offshore accounts return home. CASH FLOW. CASH FLOW. CASH FLOW. All other initiatives BLOW. Get our money away from bookkeepers, financiers and administrators in the financial services sectors. TODAY. 
Jun 16, 2014 11:25AM
Just look at this shidt Anthony.  The world is rockin into chaos and the markets are looking the other way.  There is no way you can convince me that there aren't kids sitting in some room at Goldman Sachs Buying stocks with free FED money to keep this phoney confidence up.  This is total B.S. Anthony.  We are living in LaLa land and when reality comes a knockin it is going to hurt like Hell.
Jun 15, 2014 11:07AM
Iraq means nothing in the Long Run. No matter who rules - eventually the oil will be back on the market. In the meantime let them kill each other.
Jun 16, 2014 8:13AM
I condemn everyone who made Oil and Gas the final battleground for Modern Man. You are old and your organs are hard. You want to take the world with you as you die. Your money couldn't buy you immortality, thank GOD it didn't. You should all meet somewhere and end your pathetic lives as the group of terrorists you are.
Russia will end gas supplies to Ukraine. Iraq and Iran cooperate to control the single largest oil & gas reserves left on Earth. Big Inherited Business Platforms worldwide ensure that we cannot live or sustain without oil-based products while killing off every alternative. 
KNOW-- hyperinflation. Less than 3% of the global currencies exist out of the markets and all of the money in them is co-mingled with fake, fiat and dark pool funds. The world's central banks and all financial sectors are a joke. Reconciliation would quickly reveal they are riddled with cancer and no value. ARE YOU STILL INVESTED? Idiots. 
Jun 16, 2014 12:03PM

Of course I spoke and wrote of this problem, many times, before our latest incursions into Iraq and Afghan...

That it would be a lose-lose-lose situation...

American and Coalition lives lost...As soldiers or advisors.

Civilian casualties or refugees...And a demand on American Immigration and other Countries.

And 10s-100s of Billions in lost Treasure, monetarily...Never to be paid back or recouped.

We have supported different avenues of intent, for decades since WW2, in the Middle East..

The Majority have ended in "absolute failure."


Pakistan/Afghanistan...Border disputes and the War with Russia.

Iran....The Shah.

Saudis....that ended in chasing us out.

Kuwait...Where we/they had an established border, but it cost us Millions or more.

Other North African Countries...And the Arabian Peninsular.

And now back in Iraq and Afghan....

Wish someone could point out what we have gained, and what has really been changed say since 100-200 years ago...Maybe even a thousand or more...??

Except they have more money and bigger, better built cities in some places.

And the U.S. has spent trillion upon trillions of dollars.

Jun 17, 2014 6:00PM
Where are those Repukelican's food trucks gonna be...?  I need some maps. Are they gonna be run by Rethuglicans ??
Jun 17, 2014 5:44PM
You think putting yet another sunni into power with pre-existing republican guard thugs ready to massacre the shiites and kurds would have been a better option.  you know nothing.  ever since the times of gordon of khartoum and lawrence of arabia there has never been a solution due to the CENTURIES-OLD hatred among the tribes and the various religious and ethnic factions.

we could use this current situ to force al-maliki to finally integrate the three nations into one.  do some reading ... better yet join the foreign legion and make a diff ... 
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