Expect higher volatility
According to several analysts, markets have become too complacent about oil prices and geopolitical risk as a result of low volatility. Over the past five years, Brent crude has largely hovered around $110 per barrel.
"Volatility in markets remains at all-time lows, even the pricing of risk is still quite low so at this point, investors are not yet pricing in significant problems [from Iraq]. They are slightly fearful but they have not yet reacted," Vadim Zlotnikov, chief market strategist and co-head of multi-asset solutions at AllianceBernstein told CNBC on Tuesday.
But Morgan Stanley warns that volatility could rise if violence continues. Brent has already spiked to a nine-month high of $113 a barrel in recent days and the bank reckons prices could jump as high as $116.
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"Beyond the near-term short covering, new concerns about supply and prices may finally break volatility and oil prices out of a range and disrupt short volatility strategies," the report said.
Ninety-two percent of respondents in the latest CNBC poll of market strategists said they are bullish on oil prices with most saying that disruption in Iraqi exports could push Brent to $120.