The price of oil jumped Thursday as the insurgency in Iraq raised the risk of disruptions to supplies at a time when other major oil-producing countries are already pumping near capacity.
The al-Qaida inspired group that captured two key cities in Iraq earlier this week vowed Thursday to march on to Baghdad.
One of those two cities, Mosul, lies in an area that is a major gateway for Iraqi oil. While the loss of the city has no immediate effect on oil exports, now at more than three million barrels a day, it adds to concerns over security and the country's plans to expand oil production.
Benchmark West Texas Intermediate crude rose $2.13 or two per cent to close at US$106.53 a barrel on the New York Mercantile Exchange. Brent crude, a benchmark for international oils, rose more sharply, gaining $3.07, or 2.8 per cent, to US$113.02 a barrel on the ICE Futures exchange in London.
Analysts say the uncertainty of the situation in Iraq raises the chance of further increases in oil prices.
"Because we view a quick resolution to the Iraqi turmoil as highly unlikely, with the situation more apt toward deterioration than improvement, we expect additional price gains, with WTI pushing up into the $110-112 zone while Brent potentially advances to as high as $117-$119," Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates, wrote in a note to clients.
Before the news of the insurgency in Iraq, oil prices were already pressing higher after OPEC countries agreed this week to keep their output target unchanged at 30 million barrels a day. Traders interpreted the decision as recognition within OPEC that most members would not be able to substantially increase output in the short-term even if the world's demand for crude increases.
Only Saudi Arabia would be able to substantially increase production, something that may soon be required if the situation in Iraq continues to push oil prices higher, analysts said.
In other energy futures trading on Nymex, wholesale gasoline rose eight cents to US$3.08 a U.S. gallon (3.79 litres), heating oil added nine cents to US$2.99 a gallon and natural gas gained 25 cents to US$4.76 per 1,000 cubic feet.
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