Investors are worried about possible attacks on oil facilities in Southern Iraq that could affect crude supplies into Asia, an analyst told CNBC on Thursday.
Iraq is the second-largest oil producer in OPEC, the Organization of the Petroleum Exporting Countries. A disruption to its output level could make it hard for the oil cartel to replace the shortfall, Henning Gloystein, director for global energy and natural resources at political risk consultancy Eurasia Group, said on "Squawk Box."
"That southern facility is right at the heart of the geopolitical risk world at the moment," he said referring to oil facilities in Iraq's southern province of Basra. "This is where the oil market fears a confrontation because if that gets hit, markets will get into trouble, especially in Asia."
Basra, which is near the Umm Qasr port, accounts for nearly 85% of Iraq's crude oil production, according to the Associated Press.
Tensions in the Middle East soared after Iran on Wednesday local time launched more than a dozen ballistic missiles against Iraqi military bases housing American troops. It was an act of retaliation in response to the U.S. killing of Iran's top general, Qasem Soleimani. The attacks did not destroy major energy infrastructure that could have disrupted global crude supply.
Oil prices initially surged more than 4% at news of the missile attacks, but they subsequently dropped almost 5% when U.S. President Donald Trump said Washington would impose sanctions on Tehran instead of another military strike as feared by some investors. But the situation remains volatile and the likelihood of possible strikes on tankers or oil facilities in the region remains.
Some major Asian countries — like Japan, South Korea, China and India — rely on the Middle East for oil. Japan and South Korea have large strategic petroleum reserves in place, and China is building up its reserves. "The biggest concern would probably be India," Gloystein said, referring to a potential disruption in supply.
"(India gets) about 40% of oil from the Middle East and 20% from Iraq, and they switched to Iraq when they lost Iran and Venezuela because of the U.S. sanctions. So, they have been caught up in this geopolitical crisis and game, which they don't have a part in," he added.
Still, there is an abundance of oil in the market right now, partly due to the ramp-up of U.S. oil production, Gloystein said.
"They are producing around 13 million barrels per day of crude oil today," he said referring to the U.S. It's likely that U.S. production could go further up to 14 million barrels a day later this year or in early 2021, he added.
Gloystein pointed to the attacks on two Saudi Aramco oil facilities last year that forced Saudi Arabia, the largest oil producer in OPEC, to shut down half its total oil production. In the immediate aftermath of those attacks, oil prices rose, but they came back down again and did not "go anywhere near a $100," he said.
"There's so much oil in the market right now that a single disruption, or even a small series of disruptions in the Middle East, doesn't impact the world as much as it did five or ten years ago," Gloystein said. "That is because of U.S. shale but also Brazilian production has gone up. Even the North Sea, even Norway, which plateaued recently, is now increasing production this year."
As supplies surge, demand growth has also slowed — from about 3% a year three years ago to around 1% to 1.5% currently, he added.