Iraq crisis pushes up oil prices

Traders worry about potential for fighting to spread.

LONDON — Oil prices rose Friday to their highest levels this year on growing concern about the fighting in Iraq.

Analysts say that a sharp price spike looks unlikely at this point, but that the fighting in Iraq and turmoil with other major oil producers may keep prices relatively high.

So far, the fighting has not been near Iraq’s main oil fields and export facilities clustered around the city of Basra in the south. Cities including Mosul and Tikrit, where the fighters of the Islamic State of Iraq and the Levant have taken control, are in the north. But because Iraq has been the largest source of growth in OPEC oil production in recent years, traders worry about the potential for the fighting to spread — which is why oil prices are rising.

Of perhaps greater concern is that the growing instability in Iraq and the unrest in other big petroleum producing countries threaten to alter the geopolitical dynamics that have kept energy prices relatively stable in recent years. The Russian annexation in Crimea and the chaos in Libya “point to a systemic and seismic shift geopolitically,” Edward L. Morse, head of commodities research at Citigroup, wrote in a note to clients Friday.

Until recently, market participants have been expecting that the supply from Iraq, which is now producing about 3.3 million barrels a day, would continue to grow as a result of Western oil companies’ investments in the country’s rich but battered oil fields. In a benign world, Iraq could eventually produce about 6 million barrels a day, analysts estimate. If Iraq did attain that level, it would be about 60 percent of the roughly 10 million barrels a day that the leading oil-producing countries, Russia and Saudi Arabia, each produce.

“The longer the insurgency lasts, the more difficult it will be for Iraq to reach its potential,” Morse wrote. The change in outlook on Iraq “has radical implications for oil markets at a time of growing lost production worldwide due to intensifying disorder in a growing number of petroleumproducing countries,” he added.

Chaos in Libya has reduced oil production there to around 10 percent of the 1.3 million barrels a day the country produced in 2012. Iran’s output has been trimmed by international sanctions. Syria’s civil war has severely diminished the country’s oil production. And the industries of two other key exporters, Nigeria and Venezuela, are facing their own difficulties.

Market jitters may increase during the summer, when travel season increases demand for gasoline and jet fuel. The big Gulf Arab producers — Saudi Arabia, Kuwait and the United Arab Emirate — are expected to increase oil production to cope with increased demand, but analysts say their buffer of unused, or spare, capacity is likely to be trimmed to about 2 million barrels a day. Reducing that buffer means it could be difficult to compensate for any further problems in oil-producing countries.