Oil and Gas

Iraq conflict heightens oil market concerns: IEA

Iraq: US involvement would be 'embarrassing'

The outbreak of violence in Iraq in recent weeks, which has led to hardline Islamic militants getting closer and closer to its capital Baghdad, has "rekindled market concerns," according to the International Energy Agency.

Fighting in the country has intensified this week, with the Islamic State of Iraq and al-Sham (Isis), a breakaway group from al-Qaeda, making further inroads into Iraqi Kurdistan, the autonomous region in the north of the country, and even approaching its capital.

This has sent the price of oil soaring to new highs for the year. This had been set to be Iraq's best year for oil production in three decades, but that now looks under threat.

Iraq is projected to provide roughly 60 percent of the growth in crude production capacity for Organisation of Petroleum Exporting Countries (OPEC) for the rest of this decade, according to the oil cartel.

Kurdish Peshmerga forces and Iraqi special forces deploy their troops and armoured vehicles outside of the oil-rich city of Kirkuk, Iraq
Anadolu Agency / Contributor | Getty Images
DATE IMPORTED:June 10, 2014Civilian children stand next to a burnt vehicle during clashes between Iraqi security forces and al Qaeda-linked Islamic State in Iraq and the Levant (ISIL) in the northern Iraq city of Mosul, June 10, 2014.
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If the situation is contained, the impact on the price of oil may be relatively muted, according to the IEA. Production from the north has been off the market since early March due to the earlier violence in the west of the country, and disruption to the region's ability to get its oil to the market via Turkey. Supply had been on the rise from the south of the country, however.

"There is now an elevated risk of opportunistic combined armed attacks by ISIL targeting energy assets in southern provinces, particularly given their presence in northern Babil province overlooking Highways 1 and 8, two of the three main highways connecting Baghdad and Basra," according to Anna Boyd, manager, MENA country risk for IHS.

Iraq itself is a relatively small part of the OPEC output, and any losses from its supply could potentially be met by other oil exporters. However, there are also concerns that heightened risk in Iraq could further destabilize the rest of the region.

"Perception of heightened political risk in North Africa and the Middle East and chronic disruptions in Libyan exports have been a feature of the market for some time, but so far have been largely offset by record growth in non‐OPEC supply," the IEA said in its monthly report.

- By CNBC's Catherine Boyle