With the noose tightening around Iran, one would expect that oil prices would increase tremendously and affect everything that has got to do with money in our lives. The U.S. led sanctions against Iran are meant to stop that nation from producing nuclear weapons, a claim that the Islamic nation has continuously denied. However, the denials will not convince anyone, as U.N. inspectors have noted suspicious activities and the refusal to admit them to certain sites only increases the suspicion. Iran probably has the world's largest combined oil and natural gas reserves, and it has every reason to act in a haughty manner.
Iranian foreign ministers have again claimed that sanctions have not harmed them and that Iranian oil exports are as they were before. This is something that most of us can't believe and the numbers do tell us that Iran is beginning to feel the weight of the sanctions. Other major producers like Saudi Arabia and Iraq have continued to produce more oil than we estimated and it has, in fact, caused a surplus of oil in the world.
OPEC's Iraqi president Mr Abdul Karim al Luaibi accused Saudi Arabia, Kuwait and United Arab Emirates of producing surplus oil, which has driven down oil prices. He also denied that his own country is overproducing oil to compensate for the restrictions on Iranian oil. We must remember that all is not well in Iraq in terms of internal cooperation between Southern Iraq and Kurdistan. Kurdistan Regional Government has attracted several players like Chevron (CVX), Exxon Mobil (XOM) and BP (BP), who have all either begun to explore and produce oil and gas, or are planning to do so in the near future.
Exxon Mobil was severely penalized by the Iraqi government for disregarding the central government and going ahead with exploration and drilling activities in Kurdistan. Shell (RDS.A), on the other hand, has a successful oil exploration business centered around Basra, at the Majnoon facility. With more oil companies planning to get the most out of both Southern Iraq and Kurdistan, things are really going to heat up. Strangely, we saw that Iran and Iraq have been buddying up a lot lately, and even mentioned how warm they feel toward each other at the OPEC summit. This has raised suspicions across the Middle East about the state of affairs between Iran and Iraq.
Strangely, all the oil companies involved have very little to say, as the relationships between Middle Eastern nations are very complex and knotted. Iraq supports Iran's push for setting lower production limits and keep the prices high. Iraq has entered as a major player after 20 years of being in limbo. Though Exxon has been penalized for its Kurdistan initiatives, it has a lot to look forward to. The ambivalent relationship between Iraq and Iran will eventually have to settle down in favor of the west. When it finally settles down, Iraq will have no option but to agree to the legalities assumed by contracts signed between Exxon Mobil and Kurdistan Regional Government.
Meanwhile, Chevron and ConocoPhillips (COP) have signed an agreement together to developing and upgrading an existing facility at an Iraq-owned petrochemicals factory in Basra province. Neither of the companies have given any details about this particular project. From all these activities in Iraq, one can only surmise that no matter how hard Iraq tries to tell the world that it wants to keep the production low in accordance to its isolated neighbor Iran, it will eventually end up producing a lot of oil. This will certainly not go well with Iran for obvious reasons.
When Iraq produces a lot of oil, it becomes easier for western nations to tighten the noose around Iran and make sure that the sanctions are having an effect. When there is no increase in the oil production, countries like South Korea, South Africa and India will begin to look to Iran again for oil, thus negating the desired effect of the sanctions. If Exxon Mobil prefers to overproduce in Iraq and has a steady supply of surplus oil, it is not a bad idea at all. In fact, Exxon will indirectly help in tightening the noose around Iran and help in making sure that there isn't a nuclear conflict in the Middle East.
Even oil companies like Exxon, Chevron and others, have a responsibility in making the sanctions work. The onus lies on them to make sure that there is a steady supply of oil available in the market, even if Iranian oil supplies are completely cut off. A company like Exxon must then not only explore for possibilities in Kurdistan but also in Southern Iraq, by having high level negotiations and discussions with those in power at Baghdad. It is simply not the responsibility of governments to throw sanctions on Iran, while there is no oil left for the countries of the world. In such a scenario, the sanctions wouldn't be successful and Iran will stand to gain in the end.
Until the Iranian regime is replaced by a friendlier, democratic and sane government by military force or through sanctions, everyone who is involved in the oil business will have to assume responsibility of oil production on supply. Exxon has already done that by venturing into Kurdistan, and I expect it will continue to tackle the central government in Baghdad effectively. It would probably be prudent to invest in Exxon Mobil's stock at the moment, as it is making a lot of efforts to establish itself in Kurdistan. Eventually, Iraqi government will open up oil fields to Exxon in the south as well. Only, Exxon should realize its own importance in the wider political arena, where its increase in oil production will eventually tame down, or even help get rid of the Iranian regime.
In the second quarter of 2012, Exxon Mobil announced a dividend increase of 21% and has been outperforming in the energy sector. In fact, the dividend yield is higher than its 10 year average. Apart from being bullish in exploring in and around Kurdistan, Exxon Mobil also bought back $5 billion worth of shares from the market. With a margin of 8.68%, Exxon has one of the highest returns on assets. If Exxon continues to explore in Kurdistan and create problems for Iraq and Iran relationships, we can expect that the sanctions on Iran will actually begin to work. With admirable financial performance and thanks to political influence in the region, Exxon can indeed gain the confidence of not only investors, but also other companies that operate in the region.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.