What's Ahead for Oil Stocks and ETFs as Iraq Turmoil Continues

Oil stocks and oil exchange-traded funds (ETFs) are getting more attention as oil futures close out their biggest weekly gain of the year.

Oil prices rallied for a third consecutive day Friday as Sunni militants continued their advance toward Baghdad, stoking fears that Iraq is headed for civil war and its abundant oil exports could be in jeopardy.

Light, sweet crude for July soared to $107.68 a barrel in overnight trading, a nine-month high. The most actively traded contract recently traded up $0.14, or 0.1%, at $106.67 a barrel.

Early in Friday's session, Brent crude, the global oil benchmark, hit an intraday high of $114.69. That's up some $4 since the start of the week.

Worries are mounting over the world's oil supply amid the chaos in Iraq.

"We don't know yet what overall impact this will have on Iraqi imports," Money Morning Global Energy Strategist Dr. Kent Moors said to FOX Business. "There have been indications that some of the major Western companies currently developing fields in southern Iraq may be suspending activities." (Watch his full interview in the accompanying video).

Iraq, the seventh-largest oil producer in the world in 2013, produced some 3.6 million barrels of oil a day in February, its highest level since before the U.S.-led invasion in 2003, according to the U.S. Energy Information Administration. Moreover, Iran is the second-largest oil producer among the Organization of the Petroleum Exporting Countries (OPEC) members and accounts for roughly 4% of the global oil production.

Global supply and demand is already stretched due to reduced production in Libya and Iran. Additionally, shipments on an oil pipeline from Iraq to Turkey have been choked off since early March for geopolitical reasons. Plus, OPEC decided on Wednesday to maintain current production quotas, even though the group said it expects increasing demand to put upward pressure on oil prices.

Crude prices had largely traded in a tight range until recently. The escalating unrest in Iraq has definitely lured market participants back to the commodity.

With oil prices expected to continue to rise, what does this mean for oil stocks and ETFs?

Investing in Oil Stocks and ETFs Now

Moors explains:

"The major field projects in Iraq have yet to be hit by the latest insurrection. Twenty percent of the national oil production is in the north, centered about the city of Kirkuk and the pipeline moving crude to Ceyhan in southwestern Turkey. Both the city and the production are now under the control of the semi-autonomous region of Kurdistan and its militia (the peshmerga)."

Moors said that while the fighting remains far from the heart of Iraq's oil industry in the country's south, "the lack of a cohesive central government administration would create significant problems for the international majors ramping up production at huge southern fields."

The uncertainty, Moors added, will weigh heavily on these companies as drilling programs are likely to be impacted.

"When that happens, oil-field services (OFS) providers are always the first hit. Investors can take profits if they have some in their portfolios," he said.

Major oil companies in the region with much broader exposure could be pinched at first, but then are likely to rise. They include BP Plc. (NYSE ADR: BP), Chevron Corp. (NYSE: CVX), Exxon Mobil Corp. (NYSE: XOM), Halliburton Co. (NYSE: HAL), and Royal Dutch Shell Plc. (NYSE ADR: RDS.A).

Yet, best positioned to rise are oil price-related investment vehicles.

Investors can look for lucrative opportunities in these three oil ETFs:

  • Energy Select Sector SPDR ETF (NYSE Arca: XLE) is a diversified basket of oil giants. Top holdings include Exxon, Chevron, Conoco Philips, and Halliburton.
  • United States Oil Fund LP ETF (NYSE Arca: USO) seeks to reflect the performance of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund invests in future contracts for light sweet crude, as well as other types of crude oil, heating oil, gasoline, natural gas, and other petroleum-based fuels that are traded on exchanges.
  • United States Brent Oil Fund LP (NYSE Arca: BNO) aims to replicate the daily changes, on percentage terms, of the spot price of Brent crude as measured by the changes in the price of the near-month Brent futures contracts, as traded on the ICE Futures Exchange.

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