London oil prices have continued to move higher this week as the Iraqi situation deteriorated further with Brent closing on Wednesday at $114.22.  New York futures, however, drifted lower as traders ignored Iraq to focus on domestic developments such as inventories and production increases. The US financial press has dwelled on the fact that the most Iraqi oil comes from the south which for now is largely immune from the turmoil north of Baghdad.  The general US perception seems to be that Washington or Tehran will intervene with sufficient force to save Iraqi exports which are no longer important anyway due to increasing US domestic oil production.  New York futures settled Wednesday at $105.97 resulting in the Brent/WTI spread widening to $8.67.
Compared to the potential dangers in the Iraqi situation, there was little of note in the weekly stocks report. Imports remain the same at 7.2 million b/d; new domestic production was up by 17,000 b/d; refinery utilization was down a bit due to unplanned outages; and demand for oil products is up at bit from last year– likely due to export demand.
US natural gas prices have been flat this week as traders try to figure out just how hot it will be this summer.
Heavy fighting between government and insurgent forces continued north of Baghdad this week with the insurgents capturing a major town on the Syrian border.  The Maliki government has asked for direct US air support which Washington seems reluctant to supply at the minute. The insurgents appear to have captured the Baiji refinery which supplies the bulk of refined products for northern Iraq including the fuel for power stations.  Should this refinery remain in insurgent hands, or be damaged in the fighting, fuel shortages are likely to develop in the country with unpredictable consequences.
Some non-essential foreign oil workers and some foreign embassy personnel are already being evacuated from the country leading even the Wall Street Journal starts to raise doubts as to whether there will be substantial increases in Iraqi oil production in coming years.  The US is beefing up the guard force around the 5,500 person US embassy out of concerns over increasing violence in Baghdad.
What happens next is likely to depend on how much and what kind of foreign intervention we see in the next few weeks. Baghdad is attempting to raise large numbers of Shiite volunteers to counter the threat, but these are unlikely to be successful in driving back the more experiencedinsurgent forces. Tehran already has limited numbers of advisors in the country and is the only country likely to intervene with ground forces. Washington’s position remains unclear, but it seems likely to intervene if the southern oil fields or Baghdad are directly threatened.
It is clear that the gains made by the Sunni insurgents in the last week have changed the situation in the region radically as well as the long-term prospects for oil exports. This situation could move in so many directions that speculating about what is going to happen is a hollow exercise. Probably the most dangerous aspect of all this is the increasing bitterness between Sunnis and Shiites which could easily spread into neighboring states.