The Coming Storm in the Middle East

A new CIA drone base near Erbil, in the Kurdish region of Iraq, seems to have become America’s portal into the Syrian-Iraqi war – a war U.S. President Barack Obama says the United States will not enter.

Jul 24, 2014 at 9:33AM

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new CIA drone base near Erbil, in the Kurdish region of Iraq, seems to have become America's portal into the Syrian-Iraqi war – a war U.S. President Barack Obama says the United States will not enter.

Late in the game, it seems Washington has awakened to the realization that a new, powerful force is threatening Middle Eastern oil supplies and seems to have an unstoppable momentum.  

August oil futures are showing a spike in the price of crude, but that is more likely a reflection of the situation in Libya and Gaza. Caliph Ibrahim – better known as Abu Bakr al-Baghdadi -- is not yet written into investor's thinking.

Al-Baghdadi is the founder of the Islamic State of Iraq and Al-Sham – which recently shortened its name to the Islamic State – who has been consolidating the jihadist groups fighting in Syria and Iraq. Through a blend of psychological warfare and skilful business management, al-Baghdadi has taken radical Islam beyond the point most other movements have, in terms of extreme tactics and savage treatment of enemies. The effect has been that the opposition is demoralized and ready to surrender almost before they are confronted. Many other jihadist leaders have rejected him, but that has to do more with his success rather than his ideology.

As al-Baghdadi advanced through Syria and Iraq, his men looted financial institutions and imposed punitive taxes on Christians and other groups. Through Iraqi middlemen, he has been selling stolen oil, which has forced the Iranians to close their frontier to the truck loads of crude.

Saudi Arabia has positioned 30,000 troops on its border with Iraq, but is ignoring appeals from the Iranians to join efforts to stop the advance of IS. Instead, the Saudis are warning Iran not to intervene to support Iraqi Shiites. Tribes linked to Saudi Arabia are fighting alongside IS and the Saudis do not want to provoke a rift with their related tribes that they have been financing by taking a strong position against the Sunni group.

So far, IS has avoided direct confrontations with the Kurds, which has created a false sense of security among investors. The Kurdish Peshmerga is too well organized and directed to be easily defeated, and there is nothing at this time to gain from a conflict. The foremost objective of the IS is to acquire oil fields in Iraq and beyond. 

Al-Baghdadi has taken the movement one step further by declaring the creation of a Caliphate, of which he has named himself the leader and taken the title "Caliph Ibrahim." The Caliphate is to extend worldwide, and included in that global sphere is no small number of oil producing areas. But it is the production in the Middle East that is under immediate threat.  

The power of the movement should not be under estimated in spite of the small numbers of actual dedicated members. Caliph Ibrahim grasps that disrupting oil shipments will have a serious impact upon the world economy. Following his usual strategy of audacity and intimidation, we can expect to see him threatening oil flows in order to extract concessions while he consolidates power.

It means that crude producers outside of the Middle East -- where he cannot reach effectively -- will have an advantage. BP (NYSE:BP) is one of the safer majors, with production in North America, the North Sea, and Angola and only a small part of reserves in Azerbaijan, which is relatively safe from disruption. The company pays a dividend while investors are waiting for the potential Islamic storm to sweep across the area.

One development that would raise a red flag that serious trouble in the oil fields is pending is the arrival of Egyptian troops in Saudi Arabia to defend the borders.

In spite of having the most modern equipment available, the Saudi Army is scarcely a real fighting force. They relied in the past upon Pakistani troops and now they will have to depend upon Egyptian forces to protect the oil fields.

Prudent investors should begin establishing small positions to avoid the panic buying when the true extent of the danger in the Middle East is realized.

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Written by Felix Imonti at Oilprice.com.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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