DUBAI 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.
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.
The pipeline has pumped around 300,000 bpd since late August, but an outage would be nothing new -- the line has been repeatedly hit by saboteurs further south in Iraq, keeping it out of action for most of the time since the U.S.-led invasion in March 2003.
"Damage to that pipeline would be unlikely to affect price movements significantly," London-based Exclusive Analysis, which assesses political and violent risk, said in comments e-mailed to Reuters.
"The volumes in question are ... not sufficient to affect the global balance of oil demand and supply in any significant way."
Turkey has little reason to do damage to the pipeline, as Turkish refiner Tupras often buys the oil when the pipeline is working. An Iraqi oil official said on Monday that Iraq was in talks with Tupras to establish a long-term supply contract for crude from the pipeline.
Turkey is also the transit route for around 700,000 bpd of oil from Azerbaijan pumped through the Baku-Ceyhan pipeline, but the route is to the northwest of the Turkey-Iraq border.
Some risk to Turkey's domestic energy infrastructure may come from any reprise attacks undertaken by the PKK in Turkey itself.
"We expect the PKK to target critical infrastructure such as the electricity distribution networks in southeastern Turkey," Exclusive Analysis said.