Iraq and the TSX

Energy stocks shoot up as jihadists seize huge sections of the country.

 

A small but well trained and battle toughened army of jihadists has swept across northern Iraq desert sandstorm, roiling oil markets and sending political leaders in both the Middle East and the Western world into emergency mode.

The militant group, which goes under the name of the Islamic State of Iraq and the Levant (ISIL), has seized key cities and now threatens the capital, Baghdad.

So far, the militants, whose goal is to create a medieval-style caliphate that incorporates the Sunni areas of Syria and Iraq, have not taken control of any of the country’s major oil fields, which are mainly located in the south and in the autonomous Kurdish region. But they have besieged the country’s largest oil refinery and the threat of an all-out civil war could cut into Iraq’s production, which was running at about 3.3 million barrels a day in April. The country has the fifth-largest pool of proven reserves in the world.

As a result, the price of crude moved sharply higher, pushing gasoline prices to record highs in some provinces and providing a windfall for Canadian oil companies and their investors. As I write, the S&P/TSX Capped Energy Index is up 9% for the month of June and was showing a year-to-date gain of 23.2%.

That’s well ahead of the pace set by the S&P/TSX Composite, which at that point was up 10.9% so far in 2014. The Capped Energy Index is now at its highest level since the spring of 2011.

Battles are also shaping up over Kinder Morgan’s proposal to twin its existing Trans-Mountain pipeline to Vancouver and TransCanada’s ambitious $12 billion Energy East project, which would move Alberta crude as far east as Quebec City and St. John, New Brunswick.

Some of these projects will eventually become reality but that is years in the future. In the meantime, oil companies are increasingly relying on rail to move their output to markets, at higher costs and increased environmental risk. Finance Minister Joe Oliver, who until recently held the Natural Resources portfolio, said recently that the discounted prices that producers are forced to accept for their landlocked oil cost the Canadian economy $30 billion last year. “Canadians need to understand the consequences of not moving our resources to tidewater,” he said.

You’d think that in light of all these problems, energy stocks would have been in the doldrums prior to the jihadist-inspired spike in the price of oil. But that isn’t the case. The sector has rebounded strongly, thanks in part to the lower Canadian dollar, and there appears to be more upside potential, especially if the Iraqi conflict widens.