• Iraq crucial to meeting oil production growth
• Higher oil prices if crisis spreads
• Seeking the “winners” and “losers”

Crude oil prices have risen with tensions in Iraq

Oil prices have been more volatile of late due to the conflict in Iraq, with WTI crude rising close to about US$107/bbl and Brent US$113/bbl last week to hit a nine-month high. Currently, they are still hovering at these levels due to uncertainties over Iraq’s situation, which is understandable as Iraq’s average oil production in 2013 was 3m bbl/day, accounting for 8% of OPEC’s supply. What is more important, however, is that the IEA, in its latest oil market report, has forecasted that Iraq is expected to provide 60% of OPEC’s oil production growth in the next decade. Iraq is also the third largest oil exporter in the world after Saudi Arabia and Russia, with an increasing share of these exports directed to fast-growing Asian markets. It is everyone’s hope that the crisis will be contained soon, but should an escalation occur, we may see more interest in certain sectors whose earnings are affected by oil prices.

Discerning the beneficiaries...

With higher oil prices, the clear winners are upstream oil and gas players [Overweight], as there would be more oil and gas exploration and production activity, but we point out that sustained high prices are required for this, rather than mere spikes due to geopolitical tensions. However, oil and gas companies that derive a substantial portion of their earnings from Iraq may be adversely affected if oil production is reduced due to the conflict. Coal miners may also benefit due to the substitution effect, while crude palm oil plays [Neutral] may also see a mild positive effect on their stocks due to the positive correlation between crude oil and crude palm oil prices.

... and those that may lose out

On the other hand, possible “losers” are refiners, utilities (those without cost passthrough mechanisms) and fuel-intensive industries such as transportation. We have an Underweight rating on the Air Transport sector, but are Overweight Land Transport. Companies with extensive operations in Iraq and neighbouring countries could also be at risk should the conflict spread.

Source: OCBC Research - 20 Jun 2014