Oil prices were at a nine-month high on Friday amid concerns that developments in Iraq may affect global supplies.
Brent crude futures rose three per cent to $112.96 per barrel in London, while the benchmark U.S. oil contract for July delivery was up 38 cents to $106.91 a barrel in electronic trading on the New York Mercantile Exchange after passing $107 earlier in the day. It was the highest reading for both since September.
Canada’s Western Canadian Select contract (which trades at a discount to others because it has a different chemical composition and must be sent far afield to be refined) ended the day at $86.66 a barrel, down 57 cents on the day.
The higher oil prices are a reaction to concern over future production from northern Iraq, now under the control of Sunni rebel group Islamic State of Iraq and the Levant.
Militants have taken over more Iraqi cities and were moving toward Baghdad on Friday, a development that could destabilize much of the Middle East.
The higher oil futures prices could push up gasoline prices in Canada..
Roger McKnight, an analyst with En-Pro International, says he sees pump prices rising by more than two cents per litre in the Toronto area in the next day.
Dan McTeague, who runs gasoline price-forecasting website tomorrowsgaspricetoday, says the runup in gas prices is based on speculation rather than real events in Iraq.
"When they see excessive speculation..[it's] driving prices to levels that have no basis in the fundamental supply and demand. The world is awashsin crude, particularly in North America," he told CBC News.
The Paris-based International Energy Agency put out its monthly report on oil supplies Friday, amid the turmoil, saying Iraq’s oil exporting is not at immediate risk.
"Concerning as the latest events in Iraq may be, they might not for now, if the conflict does not spread further, put additional Iraqi oil supplies immediately at risk," the IEA said.
Iraq hasn’t exported any oil from its north since March due to repeated attacks on its pipeline to Turkey, but the bulk of its oil production is concentrated in the far south of the country.
IEA says world needs Iraqi oil
The IEA put Iraq's daily oil production in May at 3.37 million barrels per day, up from 3.32 million barrels a day in April.
The extent to which its exports are affected will depend on how far the insurgents are able to extend their hold in Iraq.
The IEA warns Iraqi oil supply is crucial to meeting growing global oil demand in the coming years and predicts that roughly 60 per cent of the growth in oil production capacity from the Organization of the Petroleum Exporting Countries in the next decade will come from Iraq.
Oil prices have been relatively stable for the last four years, as a reduction of oil output from OPEC was offset by increased supplies from North America, especially U.S. shale oil.
The IEA says Saudia Arabia has spare capacity and can boost its output to calm markets if supplies are cut off elsewhere.
But OPEC-member Libya has slashed its output to less than 100,000 barrels per day in early June because of ongoing violence.
Now the unexpected developments in Iraq are putting pressure on world oil prices.
"It’s difficult to tell how high it may go, but definitely this is something that came out of left field. People were looking at Libya and...Syria," said Kamran Bokhari, vice-president of Middle Eastern and South Asian affairs with Stratfor, a geopolitical intelligence firm.
The insurgents are gaining ground in Sunni areas, but the south, where most of the production is centred, is Shiite-controlled, he said in an interview with CBC's The Lang & O'Leary Exchange.
"I don’t see them directly affecting oil infrastructure yet. For that to happen, they have to have the force capability to pull that off. We just don’t know that yet," he added.