Brent crude was projected by Wall Street analysts to average as much as $116 a barrel by the end of the year. Now, with violence escalating in Iraq, how far the price will rise has become anyone’s guess.

The international benchmark surged above $114 on June 13 for the first time in nine months as militants routed the Iraqi army in the north and advanced toward Baghdad, threatening to ignite a civil war. The Islamic State in Iraq and the Levant, known as ISIL, has halted repairs to the pipeline from the Kirkuk oil field to the Mediterranean port of Ceyhan in Turkey.

The conflict threatens output in OPEC’s second-biggest crude producer. The Persian Gulf country is forecast to provide 60 percent of the group’s growth for the rest of this decade, the International Energy Agency said June 13. Global consumption will “increase sharply” in the last quarter of this year and OPEC will need to pump more oil to help meet the demand, according to forecasts from the Paris-based IEA.

“We’ve been waiting for the other shoe to drop in this tightly balanced market and now it’s happened,” Katherine Spector, a commodities strategist at CIBC World Markets Inc. in New York, said June 13 by phone. “There have been lurking risks but nobody was projecting how quickly things would turn worse.”

Rising Prices

Brent for August settlement rose as much as 82 cents, or 0.7 percent, to $113.28 a barrel on the London-based ICE Futures Europe exchange today. The July contract expired June 13 after climbing 0.4 percent to $113.41, the highest close for a front-month future since Sept. 9. Vikas Dwivedi of Macquarie Group Ltd. predicts Brent will average $116 in the fourth quarter. He was the best forecaster of Brent prices in the first quarter, according to Bloomberg Rankings.

West Texas Intermediate crude, the U.S. benchmark, rose as much as 63 cents, or 0.6 percent, to $107.54 a barrel on the New York Mercantile Exchange today. U.S. regular gasoline at the pump rose 0.8 cent to an average of $3.657 a gallon on June 13, the third consecutive daily gain, according to AAA in Heathrow, Florida, the largest American motoring group.

Oil-price volatility rebounded from the lowest on record as the violence escalated in Iraq. The 20-day historical volatility of Brent futures rose as high as 13 percent on June 12, according to exchange data compiled by Bloomberg. It was at 7.2 percent on June 3, the least since the contract began trading in 1988. The volatility is a reflection of market uncertainty, according to Olivier Jakob, managing director of Switzerland-based researcher Petromatrix GmbH.

Market Movements

“The market is going to be whipsawed by headlines from Iraq,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said June 13 by phone. “If there’s shooting on the streets of Baghdad, we’ll get a spike in prices, but I don’t see WTI passing $120.”

ISIL has control of the pipeline to the 310,000 barrel-a-day Baiji refinery, the country’s biggest. The insurgents also took Mosul, the country’s second-largest city. Kurdish forces moved into Kirkuk to protect the northern oil fields from the militants. The main pipeline from that field to Turkey hasn’t operated since early March because of attacks.

The fighting hasn’t spread to the south, which the U.S. Energy Information Administration says is home to three-quarters of Iraq’s crude output. The country’s three biggest oilfields — Rumaila, West Qurna-2 and Majnoon — lie in the south, and crude production there has been increasing. The region has a Shiite majority opposed to ISIL’s Sunni militants.

Export Impact

“The immediate impact on Iraq’s crude oil exports is limited for now as the conflict in northern and western Iraq is far from the southern — and Shiite-controlled — oilfields and export terminals from where all current oil exports originate,” Goldman Sachs Group Inc. analysts Damien Courvalin, Anamaria Pieschacon and Jeffrey Currie said in a report received by e-mail yesterday and dated June 13.

If the conflict reached the southern oil fields and the port of Basra, it would “likely have a significant impact on crude prices given current supply disruption in other OPEC members, in particular Libya,” the Goldman analysts said.

Iraq’s armed forces have attacked positions held by Sunni Muslim militants to try to halt their advance, while Prime Minister Nouri al-Maliki deployed the air force to defend his Shiite-led government.

U.S. Carrier

The U.S. has dispatched an aircraft carrier to the Persian Gulf as President Barack Obama weighs options to help Maliki repel ISIL attacks. The U.S. withdrew its forces from Iraq in 2011. Obama said on June 13 that the conflict can’t be resolved unless Iraq’s leaders bridge political differences.

Iraqi crude output capacity will increase by more than 1.2 million barrels a day in the six years through 2019, the IEA estimated. Production rose to 3.3 million barrels a day last month, according to data compiled by Bloomberg. Output surged to 3.4 million in February, the highest level since 2000. Neighboring Saudi Arabia had 2.83 million barrels of spare production capacity in May.

“A disruption of Iraqi supply would represent a global energy crisis,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone on June 13. “This isn’t hyperbole.”

The increase in concern about Iraqi supply comes as fighting in Libya has curbed production in the North African country, international sanctions against Iran for its nuclear program have cut its exports and sabotage reduced the flow of Nigerian barrels.

Libyan Output

Libyan output fell by 35,000 barrels a day to 180,000 in May, the lowest level since September 2011. Production was down 87 percent from a year earlier.

“The roughly 3 million barrels a day that Iraq is producing accounts for about 10 percent of OPEC’s overall production,” Kilduff said. “The Libyan outage and the up and down in Nigerian output leave OPEC with limited spare capacity. Saudi Arabia can’t make up for a loss of Iraq.”

The 12-member Organization of Petroleum Exporting Countries, which supplies about 40 percent of the world’s oil, kept its production target unchanged at 30 million barrels a day when ministers gathered in Vienna last week.

The conflict has the potential to push U.S. crude and gasoline prices higher, Andy Lipow, president of Lipow Oil Associates LLC in Houston, said by phone yesterday.

Retail Prices

“Given the current unrest in Iraq, I expect oil prices to reach $110 here for WTI, which would mean that the national average would go towards $3.80 for gasoline,” he said. “Should we see a significant supply disruption in exports, then I expect oil prices to go to $125 and the national retail average to exceed $4 a gallon.”

It’s been almost six years since U.S. retail gasoline averaged more than $4 per gallon, in the week of July 21, 2008, according to data from the EIA.

(Source: Bloomberg)