Iraq and Rising Oil Prices

Headlines can be very powerful drivers of markets, and when the headlines involve the Middle East, war and oil supplies, you can bet the whole world gets a justified case of the jitters.

So, it should come as no surprise that the action in the commodities pits last week was a broad rally, as both gold and particularly oil prices moved sharply higher on news of the violence in Iraq. The commodity ETF DBC rallied 1.3% last week.

Given that Iraq was the main driver of commodity markets last week, it’s not surprising that oil was the best performer, as WTI and Brent crude both rallied over 4% on the news that terrorist group ISIL has seized most of the northern portion of the country (which has a lot of untapped oil reserves), and more importantly were moving south towards Baghdad (and towards the oil producing region in southern Iraq).

Oil prices were essentially flat in Monday trade, as over the weekend ISIL began to encounter resistance from Iraqi forces. Moreover, the international community now is working toward halting the group’s advance. Still, the recent action in oil via the United States Oil (USO) fund has showed a clear move higher. In fact, USO is up more than 4% since news of the ISIL violence flared up and grabbed global attention.

Yet it behooves us to see through the headlines here and keep this in mind: If ISIL gets south of Baghdad, this situation becomes materially worse and oil will rally. For now, however, the current state of affairs is largely priced into crude, which is at the highs for the year. Still, if you are looking to trade this situation (a risky but potentially profitable move), then I’d look to buy any dips in USO, or in related crude oil futures contracts.