The price of oil jumped to above $106 a barrel Thursday as an insurgency in Iraq raised the risk of disruptions to supplies at a time when other major crude-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 over 3 million barrels a day, it adds to concerns over security and the country's plans to expand oil production.
By mid-afternoon in Europe, the benchmark U.S. oil contract for July delivery was up $1.88 to $106.28 a barrel in electronic trading on the New York Mercantile Exchange. On Wednesday, the Nymex contract added 5 cents.
Brent crude, a benchmark for international oils, was up $2.25 to $112.20 a barrel on the ICE Futures exchange in London.
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.
"OPEC members -- read Saudi Arabia specifically -- might soon have to deal with the consequences of the spiraling conflict in Iraq," said a report from analysts JBC Energy in Vienna. "For now, the conflict is located in the north of the country, but it seems that the market may be concerned that it could spread toward the producing fields in the south."
Meanwhile, the U.S. Energy Department's weekly inventories report showed a larger-than-expected drop in U.S. stockpiles of crude oil, down 2.6 million barrels in the week ending June 6 from the previous week. It was expected to show a 1.2 million barrel fall, according to a survey of analysts by Platts, the energy information arm of McGraw-Hill Cos.
In other energy futures trading on Nymex:
-- Wholesale gasoline rose 5.61 cents to $3.056 a gallon.
-- Natural gas gained 3.5 cents to $4.543 per 1,000 cubic feet.
-- Heating oil added 5.25 cents to $2.956 a gallon.
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