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5 things you need to know about Iraq right now

  • By William L. Watts,
  • MarketWatch
  • – 06/14/2014
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NEW YORK — Investors were keeping calm over Iraq Friday as President Barack Obama signaled the U.S. won't take immediate military action to help the Iraqi army respond to attacks by Sunni militants in the country's north, while Iranian forces joined the Baghdad government's efforts to combat insurgent advances.

Financial markets are seeing only modest fallout from the conflict, though strategists say investors should be braced for potential volatility in oil prices. Here's what you need to know:

What is happening?

Obama said he would review military options "in the days ahead" but that any military response must be "careful." He pressed Iraq Prime Minister Kamal al-Maliki to take steps to better balance political power between Shiites and Sunnis.

Iran has already jumped to help fellow Shiites in Iraq's government against the threat, deploying Revolutionary Guard units to the country.

Iraq was on the brink of civil war after Kurdish forces took control of Kirkuk, a provincial capital city and oil-production hub in northern Iraq while Sunni militias swept through other cities in the north and threatened Baghdad.

Why is Iraq important?

Iraq is the world's eighth-largest producer of oil and ranks No. 2 in the Organization of the Petroleum Exporting Countries, or OPEC, behind Saudi Arabia. The country exports around 2.5 million barrels of oil a day. Losing that supply would be quite disruptive and could propel oil prices higher by another $15 to $20 a barrel, analysts say.

"Although the situation is some distance from the oil fields, the reality is that a $20 a barrel spike in crude prices could well prove sufficient to derail the global economic recovery," said Joao Monteiro, an analyst at Valutrades in London.

Iraq's oil production has been on the comeback trail since the height of the Iraq war. Production hit 3.6 million barrels a day in February, its highest level in more than 30 years. It has since fallen back, slipping to 3.3 million barrels a day in May, analysts say.

Iraq's production growth has been a welcome development for oil consumers as Libya struggles to return online amid persistent violence and turmoil. But the fighting casts big doubts over the government's aim to boost output to 4 million barrels a day by the end of this year and to 7 million barrels a day by 2016, note economists at Capital Economics.

What's the threat?

An underlying fear in the oil market is that the fighting will spread to Iraq's main oil-producing areas in the south. Meanwhile, Iraq's biggest refinery at Baijii in the north remains under government control, Iraqi oil minister Abdul Kareem Luaibi said Thursday, according to Reuters. Luaibi said Iraqi crude exports from its southern terminal at Basra were running at an average of 2.6 million to 2.7 million barrels a day on Wednesday.

"The northern oil fields have been taken yet that area of the country was not really active. There had been damaged pipelines due to sabotage," said Phil Flynn, senior market analyst at Price Futures Group. "Basra in the south of Iraq seems to be operating normally and any attack on Baghdad may be met with much tougher resistance."

What does it mean for oil markets?

Oil prices continued to rise Friday but trimmed early gains. ICE July Brent futures rose 21 cents, or 0.2%, to $113.23 a barrel. On Thursday, Brent jumped more than $3.

July Nymex WTI crude, the U.S. benchmark, rose 41 cents, or 0.4%, to $106.94 after trading at its highest level in at least nine months.

What does it mean for financial markets?

So far, financial markets have shown only modest reaction to the turmoil. U.S. stocks traded slightly higher Friday. Wall Street saw broad losses Thursday, which were tied to concerns about Iraq as well as soft economic data.

"Investors appear to be asleep at the wheel on Iraq, which has the potential to have a highly disruptive impact on the market," said Rebecca O'Keeffe, head of investment at stockbroker Interactive Investor in London. "Although most of the country's oil is produced in the south of the country, there is a growing risk that the escalating tensions between Shia and Sunni could spread, which increases the threat of a spike in oil prices."

Treasurys, which can often serve as havens during conflict, were showing little sign of a flight to safety. Treasury prices were under pressure Friday, pushing up yields as investors instead took cues from a speech by Bank of England Gov. Mark Carney warning that U.K. interest rates may rise sooner than expected.

Gold, which can also serve as a safe haven, was little changed, while the U.S. dollar gained a little ground versus the euro and the Japanese yen.

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