As we all have probably heard by now, insurgents in Iraq have seized many of the oil-rich country’s major cities such as Fallujah, Tikrit, Mosul, and Kirkuk, bringing the country to the brink of what could be civil war. Heading into the weekend, all eyes will be on whether or not Baghdad becomes the next battleground for ISIS (Islamic State in Iraq and Syria) and sectarian fighters such as the Kurds, and whether or not President Obama commits American resources to the fight. Politics and beliefs aside, the deteriorating situation in Iraq has the potential to impact global financial markets, most immediately the oil market.
Iraq is the second largest oil-producing member of OPEC (Organization for the Petroleum Exporting Countries) next to Saudi Arabia, pumping out more than 3.3 million barrels of oil per day. This week alone, fears of Iraqi supply coming off-line sent oil prices to nine-month highs. West Texas Intermediate crude oil (WTI) rose +4.13% this week to close at $106.91/bbl, its highest level since September 2013. Even as domestic oil production remains near all-time highs, global supply has shrunk in recent months with events in Libya, Nigeria, and now Iraq taking supply off-line, making this week’s events even more important for the global oil market.
The events in Iraq are exactly what the market doesn’t need. With trading volumes near decade lows, volatility near historic lows, and equity valuations looking fairly valued to slightly overvalued, a worsening situation in Iraq could be just the event traders have been looking for to sell stock and send the market lower. For now, we wait and see what events unfold over the weekend, and hope there isn’t a meaningful spillover into global equity markets.