Iraq unrest: Insurgents could have big impact on oil prices

The idea of volatility is returning to global energy markets, brought on by an Islamist insurgency that is threatening the political stability of oil-rich Iraq.

Oil prices jumped Thursday on news of rapid advances by the Al Qaeda-inspired group, the Islamic State in Iraq and Syria (ISIS).

One international benchmark (Brent crude futures) surged by more than $2 to about $113 per barrel by mid-afternoon, the highest level of 2014.

At issue is how vulnerable are the oil supplies from Iraq, one of the world’s important producers. But the Iraq news is also adding to pressures that have surfaced elsewhere in the world, from Libya to Venezuela.

So far, the price spike reflects concern rather than panic among oil traders. But that means prices could rise further if the insurgency isn’t effectively countered. More broadly, the Iraq unrest is reminding investors that global energy markets remain heavily dependent on the Middle East – and that the region is politically volatile.

"If this conflict knocked out Iraq as an exporter, that would have significant impact on prices," Christopher Bellew, a trader at commodities brokerage Jefferies Bache, told the Reuters news agency.

Iraq produces a little over 3 million barrels per day out of a global total of 90 million barrels per day tracked by the US Energy Information Administration. Iraq is the second-largest producer in the OPEC group of nations.

Most oil fields remain unaffected by the insurgency. But the Islamist militants have seized control of Mosul, an important Iraqi city, and captured sizable amounts of military weaponry, vehicles, and money. They have surrounded the country's largest refinery in the northern town of Baiji. And they are trying to capitalize rapidly on the absence of pressure from Iraqi forces.

ISIS “is almost certain to attempt to exploit the current momentum of its offensive in northern Iraq and seize as much territory as possible in an attempt to maintain serious political pressure on the government” in Baghdad, says Matthew Henman, head of IHS Jane’s Terrorism and Insurgency Center in London.

ISIS “may be aiming for the government to involve Shia Muslim militia groups, as it would play into its narrative of presenting itself as the defender of Iraq’s Sunni population,” he says in a written analysis.

President Obama said he is actively considering options for a US response.

“I don't rule out anything because we do have a stake in making sure that these jihadists are not getting a permanent foothold in either Iraq or Syria,” Mr. Obama said when asked whether he was contemplating airstrikes.

Iraq’s semi-autonomous ethnic Kurds took control of the important oil city of Kirkuk, near the refinery at Baiji, saying the Iraqi army had vacated the area. The news reflects the uncertainty not only about oil fields but also about whether Iraq’s borders can remain intact if the nation devolves into a protracted civil war.

Extensive oil fields in Iraq’s southern region are so far unaffected by the conflict.

Thursday’s price spike comes after a long period of general calm in global oil markets. Prices had surged back in 2008 – part of a global boom in commodity prices that was popped as a US recession deepened and turned global.

But that doesn’t mean the recent period has been uneventful.

Political turmoil has also sidelined much of the potential output of Libya, and has hampered production in Venezuela and Nigeria. Iran is crimped by Western economic sanctions. The challenges in all those OPEC nations have been offset by rising production in the US and Saudi Arabia.

Despite the steady growth of renewable energy sources and the unlocking of new fossil fuels (such as from shale or oil sands), the long run outlook is that traditional oil reserves will continue to play a vital role in global energy supplies for years to come.

“The Middle East remains central to the longer-term outlook,” an annual report by the International Energy Agency concluded. That includes Iraq as well as Saudi Arabia and other OPEC nations in the region.

So with prices at stake for everything from gasoline to airline tickets, expect Iraq and oil prices to stay in the news for a while.