20 June 2014
Last updated at 11:11
Iraqi government forces are battling rebels for control of the country’s biggest refinery
Violence in Iraq has sent oil prices close to a nine-month high.
Brent crude fell 27 cents to $114.79 a barrel, after reaching $115.71 on Thursday, the highest since September 2013.
Oilfields south of Baghdad, which export at least 2.5 million barrels per day of oil, are still unaffected.
But the fighting in the north poses a risk to supplies, while foreign oil companies are beginning to pull out staff.
Paul Horsnell, head of commodities research at Standard Chartered bank, said: “The market has priced in existing geopolitical risk.”
Global spare capacity in oil production is at about 2%, he said, meaning that a spike in demand of more than 2% will outstrip production.
Islamist-led militants and pro-government forces are engaged in fierce battles for the Baiji oil refinery and Tal Afar airport in northern Iraq.
Baiji, Iraq’s biggest refinery, is surrounded by the rebels, who say they have seized most of Tal Afar airport.
The fighting comes a day after the US said it would send some 300 military advisers to help the fight against the insurgents.
Investors may be concerned that what happened in Libya may be mirrored in Iraq, Mr Horsnell said.
Following Libya’s war and the toppling of Muammar Gaddafi, production recovered, but then eventually petered out, as a weak government and continued skirmishes disrupted production.
“Libya has shown weak central government has found it hard to maintain the flow of oil,” Mr Horsnell added.
As for where oil might go next, he said: “I don’t think there’s a lot of political risk in the current price.”
Consumers already pay “several hundred” US dollars for a barrel of petrol, a lot of which is tax and duty, so this increase is unlikely to have a major impact at the pump, he said.