News Column

Iraq turmoil pushes oil to 3-month high

June 13, 2014

Sean Farrell

Escalating violence in Iraq sent the price of oil to a three-month high as traders bet that advances made by insurgents could disrupt supplies from one of the world's largest oil exporters.

Brent crude futures rose 2% to $112.12 a barrel, the highest price since early March. The initially calm response to Sunni militants' overrunning of Mosul, Iraq's second largest city, on Tuesday turned to alarm as Isis, the al-Qaida splinter group, announced its intention to take Baghdad.

The prospect of rising oil prices because of the turmoil in Iraq prompted concerns about wider price rises that could force central banks to raise interest rates to curb inflation. That could in turn put the brakes on economic recovery in the US and UK.

Chris Beauchamp, analyst at financial spread better IG, said: "The longer-term worry is the impact of higher oil prices on inflation readings for major economies.

"With inflation edging up in the US, there will be concerns that CPI [consumer prices index] growth might get out of hand and force the Federal Reserve to take action. This is the worst-case scenario, but markets are more than capable of focusing on that to the exclusion of all others."

Concerns that the Iraqi army, controlled by the Shia-led government, was collapsing grew after soldiers left the northern oil city of Kirkuk in the control of Kurdish forces. But most oil production and export activities are in the largely Shia south, where al-Qaida influence is minimal.

Iraq's oil minister, Abdul Kareem Luaibi, said the facilities, which produce 2.6m barrels a day, were "very, very safe".

The AA said the short-term effect on prices at pumps was likely to be small. It pointed out that when the US considered military action against Syria in September the price of petrol rose by just 1p a litre.

The AA said: "A short-term surge in the oil price no longer guarantees that pump prices will shoot up 8p or 10p a litre."

Opec predicted oil markets would be balanced in the second half of the year as extra production met growing demand.

Energy shares led the FTSE 100 on speculation that rising prices would feed through to profits. BG Group, which has no presence in Iraq, rose 2.5%. BP and Royal Dutch Shell, which do have operations in the country, gained 0.7% and 0.5%.

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Source: Guardian (UK)

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