Will Iraq Instability Bring the Energy Sector to its Knees?

You are probably familiar with the saying, “a picture is worth a thousand words.” But today we’re seeing a case where a picture is worth, several hundred billion dollars. Just take a look at the upper right corner of this heat map (displaying the 1-day performance for the companies in the S&P 500).

On an otherwise up day for the market, the energy sector declined 0.33%. Some of the biggest losers include Access Midstream Partners L.P. (ACMP), Ecopetrol SA (EC) and Ring Energy Inc. (REI). Bigger players like Exxon Mobil Corp. (XOM) and Royal Dutch Shell (RDS-B) were also taken down a notch.

What’s causing the selling activity is the ongoing chaos in Iraq, unsurprisingly. At a time when the country’s southern region is expected to reach 2.8 million barrels a day next month—a three decade high—the northern region is consumed by violent clashes between Islamic militants and the Iraqi government.

Iraq is responsible for 61% of the expected growth in oil reserves from OPEC, so even though the threat has not hit the oil-rich southern region yet, the price of Brent crude is already on the rise. Last week it actually breached a nine-month high after Kurdish forces seized the oil city of Kirkuk in Northern Iraq and Al-Qaeda-inspired militants seized Tikrit. And crude oil prices are likely to remain high this summer due to the possible collapse of the Iraqi government.

Where does this all leave investors? Well, believe it or not the rising cost of Brent crude—the world standard in crude oil prices—is a boon for U.S. refiners. That’s because these domestic refiners acquire oil priced at the domestic WTI benchmark (West Texas Intermediate) and turn around at sell it at the Brent price. There is currently about a $6 gap between a barrel of Brent crude and WTI crude, so that’s essentially $6 of pure profit per barrel for U.S. refiners right now.

Experts agree that WTI will be less affected by the Iraq crisis than Brent crude so the Brent-WTI spread should remain wide for the foreseeable future. Unfortunately, these benefits won’t trickle down to U.S. drivers—we can expect rising Brent prices to put upward pressure on prices at the pump.

So my recommendation is to offset some of this by buying a high-quality energy stock or two. I have a running list of highly-rated stocks from Portfolio Grader, but the best opportunities are going to be found in my advisory newsletters. I’m currently eyeing some promising picks for Blue Chip Growth and Emerging Growth, and I’ve already added a few to Ultimate Growth and the Family Trust. So those looking for the best energy stocks would do well to check out my recommendations there.

Sincerely,

Louis Navellier

Louis Navellier

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