Will the Conflict in Iraq Hurt the Stock Market?

Historically speaking, the stock market doesn’t react well to geopolitical crises or conflicts. But this is no ordinary stock market.
conflict-in-iraqOnce again, Iraq is in a state of disarray. The country’s two major Islamic sects – the Sunnis and the Shia – have resumed the kind of religious warfare that nearly ripped Iraq apart in 2006 and 2007. Hundreds of people have already been killed. And the situation is only worsening.
President Obama deployed 275 U.S. military personnel to Iraq to protect the U.S. embassy in Baghdad in response to reports that the militant Sunni group ISIS has seized a number of Iraqi towns and cities in the last week.
War usually has a negative effect on stocks. But this market is so bullish it seems impervious to almost any outside influence – including overseas conflicts in which U.S. troops are now involved.
The S&P 500 is flat in the week since tensions escalated. Stocks are actually up a full percentage point in June, which is typically the height of the “Sell in May” period.
It’s the latest in a string of supposedly catastrophic geopolitical or financial issues that Wall Street has largely ignored. Fed tapering, sequestration, another near-default, ongoing European debt issues, even the Boston Marathon bombings last April – none of them have made much of a dent in this rally over the past couple years. So perhaps it’s no surprise that U.S. markets are similarly immune to what’s happening now in  Iraq.
The impact on oil prices has been an entirely different story.
In the last two weeks, the cost of crude oil has risen to its highest point since September at close to $107 a barrel. Oil prices shot up 5% in just 10 days.
There’s a reason for that. Iraq has the fifth-largest oil reserves in the world and the second-largest in the OPEC (Organization of the Petroleum Exporting Countries). Energy investors fear that the conflict could cut off Iraq’s oil exports. In fact, fighting forced the shutdown of the country’s biggest oil refinery earlier this week, though that facility is used exclusively for domestic consumption.
Concerns about dwindling supply in the world’s No. 5 oil producer is driving crude oil prices to nine-month highs.
Of course, if oil prices rise too high, it could put a damper on economic activity throughout the world. Remember, the only time a barrel of oil has exceeded $120 a barrel, in mid-2008, a massive global recession followed. The last time oil topped $110 a barrel, in early 2011, the S&P 500 fell 18% in four months and the U.S. unemployment rate remained stagnant for seven months.
I don’t think upheaval in one oil-exporting nation – albeit a very key one – will cause oil prices to completely go through the roof. I doubt prices are headed for $120 a barrel, or even $110 a barrel. You can see in the chart above that they’re already meeting resistance at $107.
However, the longer the conflict in Iraq persists, the more likely it is that its effects will be felt on Wall Street in some way.

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