Blog : Mission Accomplished!

by Ed Zwirn on June 13th, 2014

Good news for stocks throughout the energy and commodity sectors has emerged over the past week or so as the central government of Iraq, to the extent that there had been one, has crumbled.

This holds as true of petroleum-related penny stocks as it does alternative energy ventures. In addition, the commodity markets stand poised to prosper from conflict in Iraq and elsewhere. This reinforces a rise for both oil and commodities that had already been factored into the market as a result of recently rising economic indicators.

Immediately poised to profit tremendously are petroleum interests in the world's top oil producing nation. According to the U.S. Energy Information Administration, this honor goes to the U.S., which in 2013 produced about 12.3 million barrels a day of the stuff that dreams (and wars) are made of, trailed by Saudi Arabia's 11.6 million barrels and Russia's 10.5 million.

According to Bloomberg, Iraq (OPEC's second-largest producer) produced 3.3 million barrels of oil per day as of last month, a figure that could be presumably be taken off the table assuming the wrecking of Iraq progresses, as seems likely at this point. Beyond that, the broader instability in oil producing countries and the outlook for more of the same promises to bid oil up in speculative trading, offering an unalloyed benefit to oil producers like Russia and the U.S., which are farther from Iraq than Saudi Arabia.

This is already playing out to a limited extent. According to the Bloomberg article, oil futures rose by 1.1% overnight so far, building upon a 2% rally which occurred yesterday. Michael McCarthy, a chief strategist at CMC markets in Sydney predicted that Brent crude oil could rise to $125 a barrel, up from its present $107/barrel and even ahead of the latest round of futures speculation, which prices a barrel of oil at $113.

This leaves George Bush (both of them), Dick Cheney, Vladimir Putin and countless others with mega-stakes in the price of oil with huge coupons to clip. But the good news coming from Iraq extends far beyond the well-earned benefits being accrued by these statesmen. Individual and institutional investors are also keeping eager eyes on commodity charts.

And this windfall should extend beyond the oil sector per se. Before we even get to alternative energy, consider the huge profits to be made by alternative extraction techniques such as hydrofracking (with Putin benefiting that needy sector by threatening to cut natural gas supplies to the rest of Europe as soon as Monday) and tar sands extraction.

And the gravy train doesn't end there. The fact that the global economy is growing even as the world itself is going to hell in a hand basket bodes well for commodities, with demand poised to accelerate even as sources of supply get shut off. Solar energy companies and other members of the alternative energy subsector (which needs higher oil prices to make its products competitive) also should make out big.

As I pointed out in a July penny stock blog I called The Goldfinger Syndrome, it is not necessary to actually seize control of a commodity to profit tremendously from it. Much as Auric Goldfinger would have found it impractical to attempt to physically remove all the gold at Fort Knox, and so took its cache off the market by irradiating it, inflating the value of his holdings, the U.S. has made a wise strategic move by simultaneously biting off a competitor and bidding up the value of its oil through fear of further chaos.

Iraq also offers to help both investors and taxpayers alike. U.S Treasury debt yield had been going up lately, owing in part to recent moves by the European Central Bank. This had been worrying the investment community, which was rightly concerned that the rise in risk-free yields would damage equities. Luckily for investors, this worry has been effectively taken off the table.

The bloodshed in Iraq also is helping the U.S. to control its burgeoning budget deficits, as investors seeking safe haven reduce Treasury yields.

The win-win situation in Iraq can properly be called a win-win situation, provided you haven't been killed as a result and don't need to drive too much. Think of the benefits for the rest of us every time you wonder why the U.S. destabilized this country on the cheap, disbanded its army (which had been ready to cooperate), forgot to confiscate its weapons and proceeded to "cut and run."

One would have been justified over the past several years to wonder whether the leaders who got us into this situation had any idea what they were doing. As depressing as it can be to question the wisdom and/or sanity of our political leaders, it is uplifting to know there had been some logic involved in the decision. The latest news from Iraq should do much to restore our faith.