The Dow Jones Industrials (^DJI 0.67%) built on its upward momentum Friday morning, gaining 47 points as of 11 a.m. EDT to trade above the index's record closing high set earlier this month. Even though trouble in the Middle East presents a constant risk for stocks, market participants appear focused more on the gently rising U.S. economy and the accelerating pace of mergers and acquisitions that have lifted many individual companies' stocks in recent months. In the energy arena, ExxonMobil (XOM 0.35%) has tacked on 1% this morning while Chevron (CVX 0.33%) fell back slightly.
Responding to Iraq
Oil prices have been volatile lately, but today's oil-market moves showed some of the uncertainty investors have about the immediate future. West Texas Intermediate crude futures moved up by about $0.50 per barrel, getting close to the $107 level for the July contract. Yet Brent crude futures, which reflect prices on the world market, dropped a bit through the $115 mark. Natural-gas prices also eased back by about 1%.
Given its role as one of the world's largest oil producers, the situation in Iraq is something that Dow Jones Industrials investors are clearly keeping a close eye on. At this point, the U.S. has dedicated a small number of troops to assist the Iraqi national army in the battle against insurgents, but the domestic political situation is delicate as the Obama administration works to avoid getting mired militarily in the region again.
None of this explains why ExxonMobil and Chevron are moving in different directions today, as both companies have some exposure to Iraq. Nevertheless, even lucrative opportunities in the Kurdish region of northern Iraq aren't so substantial that they would crush the companies' earnings results. Both Dow energy giants are geographically diversified enough to withstand any direct hit from reduced exploration activity in Iraq.
Photo credit: Flickr/Mark Rain.
The bigger question is what impact sustained higher energy prices would have on the global economy if the Iraqi situation flares up for the long run. Up to a point, a price spike would simply add to Chevron's and Exxon's profits. But beyond certain levels, reductions in demand would become cost-effective for oil consumers, and that could hurt long-term prospects for the Dow energy components.
Iraq will remain a flash point geopolitically until the situation resolves itself, and given the long-held animosity among groups within that country, it's unlikely a quick solution will present itself. The Dow Jones Industrials will take their cues in large part from how ExxonMobil and Chevron respond to the situation; for now, energy investors are benefiting from their willingness to take on that risk.
