Not much oil at risk from Turkey/Iraq tension

By Simon Webb - Analysis

DUBAI (Reuters) - Only a fraction of global oil supply could be immediately threatened by a Turkish incursion into northern Iraq, but crude prices have surged on concern any conflict may escalate and disrupt the flow from the Middle East.

U.S. crude futures hit a record high of $87.97 a barrel on Tuesday, a day after the Turkish government asked its parliament for permission to launch attacks on Kurdish separatists in northern Iraq.

The effect of the dispute was magnified in oil markets as it came against a backdrop of tightening supply, said Paul Horsnell, head of commodities research at Barclays Capital.

"I think it has been taken as totemic for a general series of potential supply risks," Horsnell said. "We're hardly talking about a large supply stream that is at threat here."

"The price rise is part of a trend that has been going on for quite a while, of tightening balances in the oil market. Inventories are thinning, so geopolitical concern is going to get a different response to say a year ago, when stocks were higher."

Oil prices have been above $80 a barrel for most of the past month amid concern that supply may be strained during peak winter demand.

THREAT

Iraq and neighboring major oil producers Saudi Arabia, Iran and Kuwait between them produce over 17 million bpd, around 20 percent of the world's supply. Any hint of those supplies being affected would send oil spiraling higher.

In contrast, Iraq's Kurdish region produces just a few thousand barrels per day, a tiny fraction of global oil supply of 85 million barrels.

"The threat to the oil market comes from the potential regional fallout of an eventual Turkish attack on northern Iraq and the stability of Iraq itself, not from any isolated incursion", said Valerie Marcel, Dubai-based associate fellow and energy specialist for London think-tank Chatham House.

"Would there be any permanent claim or permanent incursion? If so, other neighboring countries may want to stake their claims."

Turkey has said its sole target would be militants of the outlawed Kurdistan Workers Party (PKK). PKK attacks on Turkish troops have led to heavy public pressure on Turkey's government to act.

Turkey's large-scale incursions in 1995 and 1997, involving an estimated 35,000 and 50,000 troops respectively, failed to dislodge PKK rebels from the Iraqi mountains.

The government and military have not commented on the troop level of a potential incursion, although many analysts believe if an operation is launched it would be considerably smaller than in the 1990s.

The largest piece of oil infrastructure in the area is a pipeline that travels from Iraq's Kirkuk oilfield, south of the Kurdish region, to Turkey's Mediterranean port of Ceyhan.