Street Capitalist: Event Driven Value Investments

In the news we’ve heard a lot of mixed accounts that always seem to push oil higher, at least for a day. Lately it’s been Turkey wanting to invade northern Iraq. One of the things I dislike about these stories is they never seem to really dig deep enough into the groups involved.

Who are the PKK? What about those Nigerian rebels? You hear about them all the time too, but you never get a sense of who these groups are or why they’re causing a ruckus.

So let’s try to get to the bottom of it.

Turkey’s issue is with the PKK (Partiya Karkerên Kurdistan or Kurdistan Workers Party). The PKK is a Marxist terrorist group whose goal is to create an independent Turkish state by stealing territory from Turkey, Iraq, Iran, and Syria.

The catalyst we’re seeing right now is the PKK’s relentless attacks the Turkish military and citizens. Recent PKK attacks killed 12 civilians in a bus ambush, and another clash killed 13 Turkish soldiers. The PKK’s campaign of violence really does not seem to be letting up; they carried these attacks out despite the Turkey’s promise of a swift military retaliation.

The Turkish people are extremely prideful, and malicious attacks such as these aren’t going to go unanswered. We saw a hint of this with some air strikes Turkey executed on the northern end of Iraq. What remains to be seen is whether the country will mount a full scale incursion with ground troops into Iraqi territory. Most analysts seem to be thinking that this won’t be the case, simply because the terrain is unfamiliar and hard to navigate. A comparison has been made with how Israeli soldiers were bogged down as they tried to invade Lebanon the summer before last.

What I believe is that Turkey will enter northern Iraq with ground troops if another attack occurs. Nationalism is at an all time high in Turkey and the nation’s citizens will not stand by idly while the PKK takes shots at them. 100,000 troops are already stationed at Turkey’s Iraqi border, ready to move in swiftly in response to any new attacks.

The Effect on Oil

Most of this is psychological. The fact of the matter is that an all out conflict is unlikely, but let’s look at the situation anyway.

100,000 bpd are exported via the Kirkuk-Ceyhan pipeline. An increase in attacks by Kurdish militants/ Collateral damage from a Turkey-PKK conflict would hinder the amount exported. This number is not enough to significantly impair the world’s supply of oil, meaning any conflicts would lead to short term psychological spikes in prices but not long term fundamental price changes. If PKK attacks crossed over from the Kirkuk-Ceyhan pipeline to the Kurdish regions of southern Turkey where the Baku-Tbilisi-Ceyhan crosses, significant damage could occur. The BTC pipeline is expected to start pumping 1,000,000 bpd in 2008, meaning that any hint of conflict would have a tremendous psychological effect on the price of oil, but also a material effect on the world’s oil supply.

This will be an event to watch carefully, a flash point here would be what’s needed to spike oil’s price to $100 a barrel but at the moment I’m not holding my breath.

Over the next two days I’ll have posts regarding the supply/demand side of things.