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Iran threat, Iraq unrest spook oil market

DUBAI, United Arab Emirates, Dec. 30 (UPI) -- Iran's threat to close the choke point Strait of Hormuz, a strategic oil artery at the southern end of the Persian Gulf, is spooking global oil markets.

If the Iranians do shut down the 112-mile waterway, they will cut off around some 15 million barrels of oil a day, largely for Asian markets, that pass through the strait in supertankers.

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That would send oil prices through the roof, even if the blockade lasts a few days.

These concerns have been heightened by growing unrest in Iraq in the wake of the U.S. military withdrawal completed about two weeks ago.

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If Iraq's exports, running at around 2.1 million barrels per day, are curtailed the disruption to global energy supplies could be catastrophic for the world economy.

Iraq ships about two-thirds of its exports through offshore terminals in the northern end of the gulf that are shipped south to the Strait of Hormuz. The rest is pumped overland in twin pipelines from the Kirkuk oil fields in northern Iraq to Turkey's Mediterranean terminal at Ceyhan.

The market's somber mood deepened with Syria's oil ministry announced Dec. 24 that production had been slashed from 380,000 bpd to 260,000 bpd because of the 9-month-old insurrection against President Bashar Assad.

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"The Syrian disruption is relatively small but oil traders are worried about the potential for a much larger outage involving Iraq after a wave of terror attacks in Baghdad threatened the country's precarious social balance," the Financial Times observed.

"The strong uptick in sectarian violence across the country is a serious cause for concern as it could set back Iraqi production targets by years," stated the oil consultancy JBC Energy, which has headquarters in Vienna.

Iraq will play a pivotal role in oil supplies over the next few decades because it is understood to have vast untapped reserves that will allow it to produce more oil as a time when the flow from other major producers' resources decreases.

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Iraq, bolstered by the advanced technology brought in by international oil majors like Royal Dutch Shell, BP, Exxon Mobil and others, has boosted oil production to 2.8 million bpd in November since 2009.

The Baghdad government has announced plans to quadruple production to 10 million-12 million bpd by 2017, rivaling archrival Iran and even Saudi Arabia, the world's top producer.

Those targets are widely seen in the oil industry as way too ambitious since Iraq's infrastructure, particularly where exports are concerned, is woefully inadequate. There are indications that the country's oil chiefs now realize they will have to lower their sights in the near-term.

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Even so, the Financial Times noted that "on paper, Iraq is set to be a bright spot of oil supply growth in 2012 in an otherwise gloomy market haunted by production disruptions."

But that's contingent on the government maintaining stability, which seems unlikely.

Against this backdrop, Iranian threats to close the Strait of Hormuz take on added resonance.

Iran's naval forces began 10 days of maneuvers around the strait and the Gulf of Oman Dec. 24. These have been widely seen as a clear warning of the disruption Tehran could cause by shutting down the waterway and blocking around one-third of the world's oil supplies.

The U.S. Navy 5th Fleet, which has headquarters in the gulf island state of Bahrain, has an aircraft carrier battle group and a Marine Expeditionary Force deployed in the region.

Adm. Habibollah Sayari, Iran's naval commander, boasted Tuesday that closing the strait would be "easier than drinking a glass of water." But he added: "Right now we don't need to close it as we have the Sea of Oman under control and we can control the (oil) transit."

Washington has warned Iran against any move to block the strait or its environs.

"Anyone who threatens to disrupt freedom of navigation in an international strait is clearly outside the community of nations," cautioned Cmdr. Amy Derrick Frost of the 5th Fleet. "Any disruption will not be tolerated."

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Tehran has threatened to close the strait if the Americans and their European allies tighten sanctions imposed on the Islamic Republic since June 2010 over its nuclear program, with throttling Iran's vital oil exports the principal objective.

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