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The price of Brent crude oil rose towards $114 a barrel on Wednesday as Sunni militants pushed forward in northern Iraq, striking the country's biggest refinery and stoking worries about oil exports as some firms pulled foreign oil workers out of the country.
Further increasing tensions, Iranian President Hassan Rouhani said his country would not hesitate to defend Shi'ite holy sites in Iraq.
Brent rose 17 cents to $113.62 a barrel by 1445 GMT. US crude however was 6 cents lower at $106.30 a barrel after a smaller than expected draw in domestic stocks.
Worries about disruption to Iraq's supply drove up both benchmarks by more than 4 per cent last week, the biggest weekly jump since July for Brent and since December for US crude.
Sunni militants on Wednesday renewed their attack on Iraq's Baiji oil refinery north of the capital Baghdad with machine-gun fire and mortars. The plant north of Baghdad has been shut and its foreign staff evacuated, although refinery officials said local staff remain in place and the military is in control of the facility.
The rapid advance of militants in northern Iraq has led oil companies to pull foreign staff out of the country, fearing violence could spread to major oilfields concentrated in the south.
"Crude prices are reacting to the headlines on the attack on the Baiji refinery," said Olivier Jakob, analyst at Zug, Switzerland-based consultancy Petromatrix.
"The insurgents are trying to create more instability. After the 2003 conflict one of the first things the United States did was to get the refinery back running and petrol shortages would create more domestic instability," Jakob said.
Iraqi officials say the southern regions that produce some 90 per cent of the country's oil are completely safe from the Islamic State of Iraq and the Levant (ISIL).
Iraq's oil output target at risk
But the International Energy Agency (IEA) said Iraq's oil output target of 4 million barrels per day by the end of the year looks increasingly at risk, just as demand is picking up due to a stronger global economy.
The possibility of crude exports increasing from the Kurdish Regional Government region as Baghdad's control weakens has nevertheless mitigated some of the supply concerns.
"That could in the short term, boost oil output and exports from KRG, potentially doubling from 120,000 bpd (barrels per day) to 250,000 bpd in July," Natixis oil markets analyst Abhishek Deshpande said.
Meanwhile US crude prices were slightly weaker after weekly data from the Energy Information Administration showed crude stocks declined less than expected to 386.5 million barrels. Crude stocks at the Cushing, Oklahoma, delivery hub rose by 247,000 barrels, the IEA said.
Oil investors will also keep an eye on the outcome of the Federal Reserve's interest rate-setting meeting later in the day. The Fed is widely expected to shave another $10 billion from its monthly bond purchases, which have supported commodity prices by injecting extra liquidity.
OIL ON THE BOIL
- Sunni militants renew attack on key refinery near Baghdad
- Oil majors pull foreign staff from key oil producer
- US domestic crude stocks decline to 386.5 million barrels -EIA
