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Global oil markets watched with growing unease Thursday as hardline militants in Iraq closed in on the country’s largest oil refinery and threatened to push into the capital, sending crude prices to one-year highs.

Western Texas Intermediate prices, the benchmark for U.S. oil, rose by 2% to US$106.53 a barrel, its highest level in nearly a year. The surge in oil prices has been sudden, as traders initially brushed off the rapid advances of an Al-Qaeda splinter group that now controls two key cities in Iraq: Mosul, the country’s second-largest city, and Tikrit, birthplace of former dictator Saddam Hussein.

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The militants are threatening to push into Baghdad and Bajji, home to the country’s largest oil refinery, which, if captured, could lead to a dangerous spike in oil prices and threaten the fragile global recovery, analysts warn.

“If conflict spreads and the market begins to doubt whether Iraq can increase its output in line with forecasts, there could be a sharp rise in world oil prices,” said Alex Griffiths, head of natural resources and commodities at Fitch Ratings Inc. “Iraqi oil production expansion is a major contributor to the long-term growth in global oil output.”