The headlines coming out of Iraq these days are more than a little bit concerning. The actions of the terrorist organization known as Iraq/Syria Islamic State (ISIS) have been hard to stomach and have also had an impact on near term crude oil prices.
Nobody likes reading about this type of violence and most people would also prefer lower oil prices. What I think investors need to realize is that what happens in Iraq is of critical importance to the entire world.
You can find the detail behind my opinion in two reports issued by the International Energy Agency (IEA) in late 2012. The IEA is the energy “watchdog” for the developed world. The report I’m referring to is called the Iraq Energy Outlook.
The reports I’m referring to are the IEA’s 2012 World Energy Outlook and a special report it released on October 9, 2012 called the Iraq Energy Outlook.
Link to both reports: http://www.iea.org/publications/
I read these reports when they were originally published in 2012. Before reading them I was very bullish on future oil prices. After reading them I decided to dedicate even more of my investment portfolio towards crude oil producers.
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In a nutshell, what excited me as an energy sector investor and terrified me as an energy consumer was what the IEA said about future oil supply and future oil prices. According the IEA (in the 2012 World Energy Outlook) oil prices in 2035 were likely to be $215 per barrel if Iraq could take its production from under 3 million barrels per day to more than 8 million barrels per day.
It wasn’t the $215 per barrel figure that got my attention, it was that $215 was the price per barrel if Iraq could almost triple its production. According to the IEA, Iraq alone was expected to provide no less than 45% of new oil production for the entire globe over the next twenty or so years.
The first question I wanted to ask someone was “what will the price of oil be if Iraq can’t come close to delivering on this”? Because I think the chances of Iraq taking production to those levels are miniscule at best.
Historically, Iraq has never has production exceed 3.5 million barrels per day, and it has only been for short stretches that it has been able to do that.
Unless I missed a memo, I don’t think Iraq has been “fixed” and that there is any reason to believe that future oil production for the country is likely to do much better.
All of this means that I would like to be invested in crude oil producers and I would prefer if those companies were located inside of North America.
Oil Stocks Have Had A Good Run – Start A Watchlist of Up And Comers
I’m bullish on oil prices, and based on what is going on and likely to continue going on it Iraq I’m really bullish on oil prices. But while I’d like to own American based oil producers I’m a little leery of the great run these stocks have had.
As the chart for the IShares U.S. Energy ETF (IYE) indicates above, American energy stocks have gone straight up over the past two years.
So while I want exposure to oil producers over the long term, I don’t think there is any rush to go out and get that exposure tomorrow.
Instead, what I’m doing is creating a watchlist of younger, more aggressive producers that are looking to break through on new energy plays around the country. These companies are under-followed and by watching them I expect to have an information advantage on the rest of the market.
The potential size of the prize here is what has perked my curiosity about the company. Third party engineers provided a resource evaluation report of the property which confirmed that it contains the potential for hundreds of millions of barrels of oil reserves.
A conventional oil discovery of that size inside the United States would be worth billions dollars. A conventional play that can be developed with lower cost vertical wells would have economics superior to those that exist in the horizontal shale and tight oil plays that are being drilled up these days.
The potential size of this play recognized by the third party resource appraisers is eye-catching, but it is very important to note that this is wildcat exploration here where the chance of failure is far greater than the chance of success.
That is why I’m keeping my eye on Virtus and other companies like it and not rushing in to buy shares. If something good happens for this company I don’t mind paying a higher price for shares rather than exposing myself to the early exploration drilling.