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Oil prices rise toward six-month high as new Iraq conflict threatens output

  • U.S. crude rose toward a six-month high on Monday as tensions escalated between Baghdad and Iraqi Kurdistan, a semiautonomous region.
  • Iraqi forces moved on Sunday and Monday to take control of oil fields in the Kurdish-held city of Kirkuk and the surrounding areas.
  • The campaign marks an escalation in a conflict that has been brewing since the Kurds held an independence referendum last month.

Oil prices closed in on the highest level in six months as a conflict in Iraq spilled over into one of the nation's key crude-producing hubs.

Iraqi forces on Sunday launched a campaign to retake control of the area surrounding Kirkuk, an ethnically diverse area controlled by the semiautonomous Iraqi Kurdistan region. Government troops took control of the North Oil Company, a military base and airport, Reuters and Dow Jones reported, marking the escalation of an intensifying dispute following a Kurdish independence referendum last month.

U.S. West Texas Intermediate crude prices hit a session high of $52.37 a barrel on Monday, the strongest level since Sept. 28 and about 50 cents shy of posting a six-month high. They eased back and were last up 41 cents at $51.86.

U.S. WTI intraday price, source: Factset

Brent crude oil peaked at $58.47 on Monday, about $1 below a more than two-year high struck last month. The international benchmark also pared gains to trade 68 cents higher at $57.85.

"The international market really took off higher on the news," said John Kilduff, founding partner at energy hedge fund Again Capital. The fallout depends on whether or not fighting actually occurs, he said.

Clashes appeared to be limited, according to initial news reports. Still, the standoff was not in the cards as recently as a week ago, Kilduff said.

The contracts hit their peaks after Reuters reported Iraqi Kurdistan temporarily shut down 350,000 barrels a day of production at the Bai Hasan and Avana oil fields due to security concerns. An Iraqi oil ministry official told Reuters operations in Kirkuk are "proceeding normally."

Iraqi Kurdistan produces between 500,000 and 600,000 barrels a day of oil. Turkey, which is allied with the central government in Baghdad, has threatened to shut down a pipeline that carries Kurdish oil to the Turkish port at Ceyhan.

Kurdish forces took control of Kirkuk and surrounding areas in 2014 after the Iraqi army abandoned large parts of northern Iraq amid an assault by the so-called Islamic State.

"It's an unfortunate turn of events. It seems that now that the Islamic State has been vanquished — their common enemy — [Iraq and the Kurds are] turning their sights back on each other in what is really a historic battle or standoff," Kilduff said.