Flaring Iraq conflict could ricochet into oil prices

Fighters of the Islamic State of Iraq and the Levant (ISIL) celebrate on vehicles taken from Iraqi security forces at a street in city of Mosul, Iraq, June 12, 2014.


Mounting violence in Iraq threatens to drive up the price of oil.

The conflict, involving forces of the militant Islamic State of Iraq and the Levant, or ISIL, pushed oil futures to a nine-month high on Thursday, while the price of Brent crude shot up $3 a barrel. U.S. crude today was at $106.71, near a nine-month high.

Some companies are already feeling the effects of that increase, as airline stocks fell sharply yesterday over concerns about fuel supplies. [CBS News will be covering the latest developments extensively tonight on the Evening News, with Holly Williams in Erbil, Clarissa Ward in Baghdad and Elizabeth Palmer in Damascus, Syria.]

The fighting comes as Iraq's oil production appeared to be hitting its stride, while crude prices have been relatively stable since 2010. In February, Iraqi oil exports rose to a record 2.8 billion barrels a day. But as the insurgents surrounded Iraq's largest refinery on Thursday in the northern town of Baiji, concerns over oil disruptions grow.

"ISIL is almost certain to attempt to exploit the current momentum of its offensive in northern Iraq and seize as much territory as possible in an attempt to maintain serious political pressure on the government," said Matthew Henman, head of IHS Jane's Terrorist and Insurgency Centre.

ISIS/ISIL has taken over at least one major city in northern Iraq. And according to the Platts industrial research group, the militants have also attacked a number of oil facilities in the region, while threatening the northern oil hub of Kirkuk.

For now, however, IHS senior oil analyst Simon Wardell says the situation has not yet had a major impact on global oil supplies. Increasing demand in the U.S., buoyed by the summer driving season and expected increases from Asia, have so far been able to keep prices from surging.

"Although the situation in Iraq is worrying, the impact on oil exports has thus far been minimal," Wardell said. "The Kurdish regions (in northern Iraq) continue to produce oil, with limited exports via pipeline to Ceyhan," a Mediterranean port in Turkey, he said in a research note.

Platts Oilgram News reports that crude exports in southern Iraq continue to flow and are for now unaffected by the violence sweeping the northern part of the country.

But even with the U.S. now producing historic amounts of oil and natural gas, analysts say any major disruptions of production from an oil giant like Iraq, a member of OPEC, could have a wide-ranging and negative economic impact.

"An oil shock, meaning a rapid rise in the price of the commodity, is a common cause of recessions in the U.S.," said Nicholas Colas, chief market strategist at ConvergEx Group, a New York-based global brokerage company.

"You can look to 1973, 1979, 1991, 2001-2003 and even 2007 for examples," he continued. "It is the kind of disruption that central banks cannot easily contain, either, since they don't have oil wells. This makes the spike in crude prices especially worrisome, since the world's developed economies are still on fairly fragile footing."

Another variables, according to Colas, is uncertainty regarding ISIS/ISIL and its plans for the region should they succeed in taking control.

"ISIS is not issuing press releases or holding press conferences," he noted. "It is very hard to know what their goals are, aside from destabilizing the current regime in Baghdad. The old saying that 'markets hate uncertainty' holds true here, and in this case predicting the outcome of the crisis is harder than any historical precedent."