Oil hits another record

Oil traders changed their minds in the middle of the day and drove prices back up into record territory, presumably because of the situation on the Iraq-Turkey border.  (Then again, it's not every day the president — even this one — warns of "World War III.")

Prices had backed off earlier in the day, but once Turkey's parliament approved an offensive against Kurdish rebels holed up in Iraq, the trend reversed.  That's even though the outcome of the vote was never in doubt… even though the prime minister says, "The passage of the motion in Parliament does not mean that an operation will be carried out at once"… and even though there's not that much oil at immediate risk if the Turkish military goes in with guns blazing.

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 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."

So what is it that has traders spooked?

Perhaps this:  If the United States is the de facto gendarme of Middle East oil supplies, and the military of a NATO ally (Turkey) carries out a raid against a terrorist group being protected by the most pro-American faction in Iraq (the Kurds), it serves to underscore the gendarme's overall impotence.  The Empire looks ever-more creaky to more and more of the region's players, good guys and bad guys alike — prompting them to hatch schemes they might not otherwise.  Perhaps that's the risk premium traders were pricing in yesterday and the day before, even if they can't articulate it in quite those terms.