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Oil prices off highs, but Iraq turmoil widens

Waiting for ISIL: An Iraqi policeman on the outskirts of Baghdad. Waiting for ISIL: An Iraqi policeman on the outskirts of Baghdad.
Waiting for ISIL: An Iraqi policeman on the outskirts of Baghdad. AHMAD AL-RUBAYE/AFP—Getty

Crude oil prices retreated from the nine-month highs they posted on Thursday but remained well bid on fears that Iraq, one of the world’s largest oil producers, is falling into civil war.

The front-month futures contract for the benchmark West Texas Intermediate blend of crude was at $106.65 a barrel at 05:30 ET, down just over a dollar from an earlier nine-month high of $107.68, but still up by over $10/bbl in the last three months.

European stocks, meanwhile, fell heavily, taking their lead from the previous session on Wall Street, which was badly spooked by the growing crisis in Iraq. The U.K. benchmark FTSE100 index fell furthest, by 0.8%, suffering a double-whammy as the Governor of the Bank of England signalled he would raise interest rates earlier than markets thought.  The German DAX index and the French CAC 40 were both down 0.2%, after falling by 1% in earlier trading.

Iraq is one of the world’s largest oil exporters, shipping over 2.5 million barrels of oil a day to world markets. Chaos in Libya and sanctions on Iran are already keeping millions of barrels of daily supplies off the market, putting upward pressure on prices, only partially offset by rising U.S. output and the possibility of Saudi Arabia bringing some of its 3 million barrels of spare capacity online.

Reports Friday have showed the Iraq conflict assuming new dimensions almost on an hourly basis, with the Wall Street Journal citing Iranian security sources as saying that Iran had deployed Revolutionary Guard units to Iraq to shore up the Shia-led government’s defense of the capital, Baghdad. Iraq’s most senior Shia cleric, Ali al-Sistani, also called on his followers to take up arms and fight ISIL, Reuters reported.

The WSJ’s report follows only hours after President Barack Obama said his staff are looking for ways to help the government of Nouri al Maliki, and White House spokesman Jay Carney refused to rule out U.S. airstrikes against the Islamic State of Iraq and the Levant, or ISIL, a militant Sunni group that has taken control of much of northern Iraq in recent weeks. The comments raise the possibility that both the U.S. and Iran could end up intervening on the same side in what looks more and more like a full-blown civil war.

ISIL was reported to have taken further territory in eastern Iraq Friday. Its forces were reported to be only 30 miles from Baghdad, having advanced from Iraq’s second-largest city, Mosul. The fall of Mosul earlier in the week caused hundreds of thousands of civilians to flee their homes.

A UN spokesman said in Geneva Friday that “the number of people killed in recent days may run into the hundreds.” He added that ISIL has conducted mass summary executions in Mosul, including one of 17 civilians in one street.

In addition to the loss of Mosul to ISIL,  Kurdish fighters have assumed control of the northern oil city of Kirkuk, after government troops abandoned their positions. However, that isn’t expected to have a direct impact on world oil supplies, as the infrastructure taking oil from that region to world markets is already out of commission.