Oil Prices Swell as Iraq Tension Heats Up

Oil prices jumped to nine-month highs on Thursday, as concerns mounted that escalating violence in Iraq could disrupt oil supplies from the second-largest OPEC producer.

Sunni Islamist militants, who took over Iraq's second-biggest city Mosul earlier this week, extended their advance south toward Baghdad and surrounded the country's largest refinery in the northern town of Baiji on Thursday.

"The fear is that will cause a threat to Iraqi oil exports," Christopher Bellew, a trader at Jefferies Bache, said. "If this conflict knocked out Iraq as an exporter, that would have significant impact on prices."

Brent futures gained $3.07 to settle at $113.02 a barrel, the highest level since Sept. 9. U.S. oil gained $2.13 to settle at $106.53 a barrel, also the highest close since Sept. 18, according to Reuters data.

Gains in U.S. crude were partly capped by high domestic production and lower reliance on imports from Iraq, analysts said. In 2013, the United States imported 341,000 bpd from Iraq, which represents less than 4 percent of the country's total crude oil imports, according to U.S. government data.

The spread <CL-LCO1=R> between the two benchmarks widened to close at $6.49 after narrowing over the last two weeks.

After an initially muted response, the oil markets gave way to growing alarm, as the Sunni rebels appeared to make rapid advances toward the Shi'ite-led government in Baghdad, threatening the country's future as a unified state.

Concern that the Baghdad-controlled Iraqi army was disintegrating and could no longer secure key oil facilities was exacerbated when soldiers fled the northern oil city of Kirkuk, leaving it in the hands of Kurdish forces.

Sunni insurgents overran Tikrit, threatening the 300,000-barrel per day Baiji refinery that supplies Baghdad. A witness who lives nearby said the refinery was surrounded by militants, but White House spokesman Jay Carney said it remained in control of the Iraqi government.

Despite concerns over supply disruptions, the bulk of Iraq's oil production and export facilities are in largely Shi'ite areas in the south of the country, where al Qaeda-inspired groups enjoy little sympathy. Those facilities, which ship about 2.6 million bpd, were "very, very safe", the country's Oil Minister Abdul Kareem Luaibi said on Wednesday.

"The big fear is if they get south of Baghdad," said Gareth Lewis-Davies, a strategist at BNP Paribas. "But there is no immediate indication that this will happen."

The spike in oil prices had pushed up U.S. gasoline and heating oil futures which is likely to impact domestic physical fuel market as it is are priced against the futures.

RBOB gasoline futures were 2.76 percent or over 8 cents higher at $3.0834 a gallon while heating oil, against which diesel and jet fuel are priced, were up 3.10 percent, or 9 cents higher at $2.9944 a gallon.

(By Lorenzo Ligato; Additional reporting By Sabina Zawadzki Lin Noueihed in London and Keith Wallis in Singapore; Editing by Dale Hudson, Susan Thomas, Marguerita Choy and Diane Craft)