ISIS advances put Iraq oil rebound on hold

ISIS attacks in Iraq have sent oil prices soaring and cast further doubt on long-term growth in Iraq's oil sector. As recently as February, oil production in Iraq was booming – a sign of economic progress that traders worry will be reversed.

The sectarian violence spreading across Iraq is rippling through global oil markets and threatening to derail the revival of Iraq's energy sector.

Jihadists led by the Islamic State of Iraq and the Levant (known as ISIS) seized cities in the north before pushing south toward Baghdad midday Thursday, according to various reports. Most of Iraq's oil production is south of Baghdad, safe for now. Still, the Sunni insurgents have targeted the country's largest refinery and the violence will block efforts to repair infrastructure critical to a recovering oil industry. Investors worry persistent violence would take significant amounts of oil off a global market already wresting with trouble in Libya and continued sanctions in Iran.

As recent as February, Iraqi oil production rose to levels not seen since 1979, when Saddam Hussein took power. It was a promising sign of economic growth after years of war, but export bottlenecks and spillover from the conflict in Syria continued to hamper output. The most recent surge of violence casts further doubt on the long-term future of Iraq's energy industry, sitting atop the world's fifth-largest proven crude oil reserves.  

"The incidents in northern Iraq have taken zero oil off the global market, considering the exports have been shut in for months, and before that were no more than 300,000 [barrels per day]," writes Ben Lando, founder and editor-in-chief of Iraq Oil Report, a Baghdad-based news and analysis service. "The increased risk to the rest of Iraq is surely spooking the market, though," Mr. Lando writes via e-mail. "[C]ontinued violence and insurgency will stretch Iraqi political, budget, security and planning thin to the point that development could be impacted, and slowly down the road Iraqi exports too."

In the north, forces from the autonomous region of Kurdistan seized control of the Iraqi oil city of Kirkuk Thursday, after Iraqi troops reportedly retreated. The Iraqi government and the Kurdish Regional Government (KRG) have long jockeyed for control of the north's oil exports. Baghdad has attempted to block KRG efforts to independently export oil, but just last month it loaded its first oil for shipment from a Turkish port. That has further strained relations between the two, but analysts expect they will have to work together to combat a common enemy.

"We will have to see if the Kurds manage to reach a deal with Baghdad over oil in exchange for [their] military support against ISIS," Robin Mills, head of consulting at the Dubai-based Manaar Energy Consulting, writes in an e-mail.

Worries that fighting would spread to Basra or Baghdad sent oil prices to nine-month highs Thursday. Brent crude rose $3.07 to close at $113.02 a barrel, according to Reuters data. That's its highest level since Sept. 9, 2013. US oil rose $2.13 to hit $106.53, the highest close since Sept. 18.

OPEC, which supplies about 40 percent of the world's oil, agreed Wednesday to keep its output levels steady even as the situation in Iraq – its second largest producer – appeared to be destabilizing.  

"If we were to lose Iraqi oil at the same time Libyan oil production is at 20 percent, and Iranian oil is still under sanctions – that means the world would have to rely on Saudi production to make up the difference," Andrew Lipow, president of Lipow Oil Associates in Houston, says in a telephone interview. "You have a mix of events that could send oil prices significantly higher."