(EnergyAsia, July 9 2014, Wednesday) — Oil prices have fallen an average five percent since peaking in late June in response to the recent upsurge in violence in Iraq and Syria. At the end of the New York trading day on June 8, North Sea Brent was trading below US$109, down from a peak of US$115.71 on June 25, while US WTI had fallen to US$103.4 from a recent high of US$107.5 on June 19.

For now, the shock has waned from last month’s emergence of the Islamic State of Iraq and Syria (ISIS) whose leader has called for the rise of a global Caliphate with himself the new chief of the Sunni faith. ISIS has shown itself to be more ruthless and violent than even Al Qaeda and other extremist groups in seizing large parts of Iraq and Syria while fighting the Iraqi government and threatening the conservative oil-producing states of the Middle East and Africa.

Oil prices began slipping in late June as fighting subsided with ISIS making little progress on the battlefield while its forces began consolidating their control over oil-rich parts of their new empire.

Prices slipped further on July 6 after Libya’s National Oil Corp (NOC) lifted force majeure on its key terminals at the ports of Es Sider and Ras Lanuf which handled nearly half the country’s oil exports before they were shut down last August. Last week, the central government and a regional militia agreed to reopen the two terminals to potentially boost Libya’s crude exports to 900,000 b/d from 350,000 b/d now.

Further dampening market sentiments, two of the country’s main oilfields have resumed operations to boost the national production to around 270,000 b/d, said the NOC.

Military conflicts combined with on-going labour disputes reduced Libya’s oil production from 1.4 million b/d in 2012 to just 203,000 b/d in May 2014, according to the Organisation of Petroleum Exporting Countries (OPEC). Libya was producing nearly 1.6 million b/d in 2011 before the outbreak of civil war that led to the overthrow of former dictator Mohamed Gaddafi.

But the market’s new-found optimism could prove fleeting as oil supplies from Iraq, OPEC’s second largest exporter, and Libya along with the rest of the region could yet be rocked by intensified fighting in an already politically volatile region.

In reaction to separate threats along their borders, Israel and Saudi Arabia have mobilised tens of thousands of troops to prepare for battle against Islamic militia groups led by Hamas and ISIS.

Israel has started bombing Hamas forces in the Gaza strip in advance of what could be a large ground offensive of 40,000 troops in retaliation for missiles being fired into the Jewish state’s territory.

Saudi Arabia, the world’s leading oil exporter, has deployed 30,000 soldiers to protect part of its 800-km border with Iraq from incursion by ISIS forces. In recent battles with highly-motivated ISIS troops, the Iraqi military has either fled or been easily defeated, raising fears that this radical Muslim group could quickly take over the Middle East.

In Libya, the rebels that have agreed to let the government reopen the ports have reneged on their word in the past, warned a US organisation lobbying to reduce the country’s oil dependence. Securing America’s Future Energy (SAFE) said Libya’s oil exports remain at risk as there is little reason to trust the rebels will honour their latest promise.

“Geopolitical disruptions in Libya and Iraq put a damper on this Fourth of July, as motorists endured the second highest gasoline prices ever for the holiday weekend,” it said.

“The spike occurred in spite of the fact that the US appears to be surpassing Saudi Arabia as the world’s top producer of liquid hydrocarbons (which, notably, includes natural gas liquids in addition to crude oil, and Saudi Arabia maintains higher installed capacity), underscoring the fact that domestic production alone can’t insulate us from oil and gasoline price spikes.”

Germany’s Commerzbank said expectations for Libya to resume oil production have weighed on the markets, but could be quickly reversed if the agreement between the government and the rebels collapsed.

The export infrastructure including the ports of Es Sider and Ras Lanuf which together can handle up to 560,000 b/d of crude exports will also have to be assessed for damage that might require significant repair and upgrade. As a result, while the government has lifted force majeure on the ports, it cannot determine when they might resume operations to export crude oil.