Crude surges, WTI hits 3 month peak as Iraq spirals into chaos

Sectarian violence in Iraq sent oil surging on Thursday, propelling both Brent and West Texas Intermediate up about two percent intraday amid growing concerns about a threat to global supply.

After a delayed reaction to turmoil raging in the country, oil prices soared as open warfare between rebel forces—threatening a reconquest of the country barely a few years after U.S. forces departed—and the government spilled on to the world stage. Iraq is a member of OPEC, second only to Saudi Arabia as one of the world’s largest producers of crude.

Read More Iraq burns again: What has sparked the fire?

With violence threatening Iraq’s civilian population and overwhelming the country’s security forces, a shadowy group known as the Islamic State in Iraq and Sham (ISIS) has managed to seize control of key cities including Mosul, the country’s second-largest, Ramadi, Falluja and Tikrit. Fears about global supply mounted, as reports surfaced that Russian tanks had moved into beleaguered Ukraine, sending crude on a tear and overwhelming the impact of lackluster U.S. economic data.

Until recently, Iraq’s oil production had recovered to levels seen prior to the 2003 war that destabilized the country. The country pumped 3.6 million barrels of crude a day in February, an annual output record that exceeded 1979’s water mark. Analysts say that although the U.S. energy renaissance has helped to contain the threat of an oil shock, risks to the stability of global oil supply have heightened considerably.

Reuters Damaged vehicles belonging to Iraqi security forces are seen during clashes between Iraqi security forces and al Qaeda-linked Islamic State in Iraq and the Levant (ISIL) in the northern Iraq city of Mosul, June 10, 2014.

Reuters
Damaged vehicles belonging to Iraqi security forces are seen during clashes between Iraqi security forces and al Qaeda-linked Islamic State in Iraq and the Levant (ISIL) in the northern Iraq city of Mosul, June 10, 2014.

Read More Oil will stay above $100, say big energy investors

“Prices would be significantly higher by about 10—12 percent if it were not for U.S. shale oil,” said Richard Hastings, macro strategist at Global Hunter Securities. He added that ISIS insurgents could easily throw the country into more chaos by disrupting the flow of both electricity and oil.

“That’s the big story: what will happen if electricity goes, and the (insurgents) don’t get what they want? Oil prices will go significantly higher,” Hastings said. “It’s history in the making.” As instability still rages in places like Syria and Libya, another major oil producer, “the map of the Middle East is being rebuilt,” he added.

Brent climbed by more than $2 to above $112 a barrel, its highest since May 29. U.S. crude soared by nearly $1.50 to above $106 a barrel, its highest since March 3.

The United States said on Wednesday it is working with Iraq’s leaders on a coordinated response to regain lost territory and would provide additional assistance to Baghdad. Iraq’s southern oilfield export facilities, which ship about 2.6 million barrels per day (bpd), were “very, very safe”, the country’s oil minister Abdul Kareem Luaibi said on Wednesday.

Oil prices were also supported by last week’s 2.6 million bpd drop in crude inventories, which came just as the summer driving season gets underway.

The tumult in the Middle East, combined with falling gasoline stockpiles domestically, all but certain to renew upward pressure on domestic retail gasoline prices. Nationally, gas is flirting near $4 per gallon, frustrating cash-strapped drivers who have yet to feel the benefits of the U.S. energy boom.

Read More Wall Street, Big Oil and your pain at the gas pump

“Oil acts as a tax on consumers,” explained Joel Guth, CEO of Gryphon Financial Partners, a member of the Hightower network. “We’re moving into the summer driving season, and if they spend more on energy consumption, it takes more money away from discretionary spending. Certainly all signs point to more volatility in oil producing countries, not less.”

–By CNBC’s Javier E. David

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