Energy traders are closely watching renewed fighting in Iraq, trying to gauge worst- and best-case scenarios for OPEC's second-biggest oil producer—and the coming weeks could be critical.
"This situation now certainly has the market on tenterhooks. It's why we're seeing the price of oil somewhat elevated" despite a period of relatively contained demand, said John Kilduff, founding partner of commodities-focused investment firm AgainCapital. "This is a very troubling development for the oil market for consumer nations," Kilduff said.
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This month, the Iraqi government of Prime Minister Nouri al-Maliki to the Islamic State of Iraq and the Levant (ISIL), a group that wants to establish a strict religious state across western Iraq's Anbar province and eastern Syria.
The worst scenario is for the Kurds to say, ‘OK, enough of you guys. We don’t want anything to do with you. All non-Kurds out.’ They can do that. They have the resources. They have a lot oil.Farouk El-Bazresearch professor, Boston University
A riot police unit convoy returns to its headquarters in Basra from the clashes between the Iraqi army and al-Qaeda fighters in Anbar province, Jan. 5, 2014.AP
News media, particularly in the United States, have made much of ISIL's declared allegiance to al-Qaeda. But more important for Iraq and the wider region, Middle East watchers say, is the fact ISIL is a Sunni movement in a Shia-majority country. For that reason, any worsening of violence in Fallujah could spark wider unrest across Iraq or the larger Middle East.
"The latest episode establishes another theater in a violent Sunni-Shiite regional power struggle that is already taking place in such places as Syria, Lebanon and Bahrain," said Ted Carpenter, senior fellow for defense and foreign policy studies at the Cato Institute. "It is dangerously simplistic to attribute the new turmoil in Anbar entirely to the actions of [an] al-Qaeda affiliate."
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Reports from Anbar have indicated that ISIL even enjoys some support from otherwise unradicalized Sunnis in the region, though sources who spoke with CNBC disagreed on that point. Al-Maliki has systematically placed his fellow Shiites in powerful government positions in Iraq and has drawn Iraq closer to Shia-dominated Iran. He's widely accused of alienating Anbar's minority Sunni population.