The deterioration of the situation in Iraq pushed Brent futures to $115.71 a barrel last Thursday, the highest level since Sept. 9, 2013. The rally has since lost momentum, as data showed Iraq's oil exports in June were near record rates at around 2.53 million barrels per day.
Iraq ships 90 percent of its crude exports from southern terminals, which are far from the Sunni insurgency.
"The supply news isn't really supporting oil prices - the only thing supporting them is the fear factor," said Carsten Fritsch, an oil analyst at Commerzbank in Frankfurt. "This reminds me of the Syrian conflict when the market spiked on worries about supply disruptions that never happened."
The conflict in Iraq has added about $3 per barrel risk premium into the Brent and U.S. crude oil market, according to Bill Baruch, senior market strategist at iitrader.com.
--By Reuters. For more information on commodities, please click here.