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The ISIL excursion into Iraq and the images of the columns of black smoke around the Beiji refinery, the country's largest, jolted the oil markets from their slumber. For about five years, oil was hardly the centre of attention. Prices were well below their 2008 peak, a new American oil rush was under way and the "peak oil" scare had vanished. The highways were safe again for SUVs with the fuel economy of an Abrams tank. Polite society talked about other issues, such as the launch date of the next iPhone.

ISIL – the Islamic State of Iraq and the Levant – changed all that. After loitering around $110 (U.S.) a barrel (the price for Brent crude, the effective global benchmark) since 2011, oil prices are moving up. Since the start of June, they have climbed 5 per cent.

But that's not the scary bit; the scary bit is that even if Iraq were not on the verge of an all-out sectarian war, prices were probably on the verge of climbing, if not surging. The oil markets have been unusually tight – demand has been climbing while inventories have gone in the opposite direction. Meanwhile, a lot of the "oil" from the vast U.S. shale formations is not really oil at all; it is a very light hydrocarbon called condensate that has dubious commercial use.

Don't believe the propaganda – the world is not really awash in oil.

In any commodity or financial market, too much of a good thing is usually too much of good thing. It's remarkable how fast the world adjusted to $100-plus oil after the post-2008-crisis plunge to $60 and then the bounce back. The price was high enough to keep exploration and development programs intact and the U.S. shale bonanza removed any fear that the loss of output in some dictator's backyard would translate into a fill-up that would effectively match the value of your beat-up Ford Explorer.

Since 2008, U.S. hydrocarbon production has grown 60 per cent or three million barrels a day to more than eight million barrels. No wonder the oil markets barely budged when the 2011 Libyan revolution and civil war removed more than one million barrels a day of Libyan exports. Those exports are still missing. A million vanished barrels here, a million there didn't seem to matter to the global oil markets because of the production cushion.

But the markets were tightening up even as American production was soaring. That's because the economic recovery in North America and Europe, and continued (if somewhat slower) growth in China, has been lifting demand. Earlier this month, the International Energy Agency said it expects oil demand this year to average 92.7 million barrels a day. That's almost one million more than it forecast a year ago. "Oil markets are in many ways tighter today that they were at the onset of the U.S. shale and tight oil boom, and considerably tighter than they were a year ago," the IEA said.

As demand rises, inventories have been coming down. The U.S. Energy Information Administration reported that, on June 6, U.S. oil stocks had fallen to a 3.6-per-cent surplus of their five-year average, from a 13-per-cent surplus last November.

Could that surplus vanish? It won't if you believe the U.S. shale oil story or if you believe that the few OPEC countries with excess capacity, notably Iraq, can fill the demand hole.

Neither scenario is a sure thing. The shale industry's dirty little secret is that a lot of the production is coming in the form of condensate, which few refiners want or can process. Texas's vast Eagle Ford shale, on its way to producing 1.5 million barrels a day, a figure typical of some of the more prolific Saudi fields, is thought to be pumping 40 per cent or more of that amount in the form of condensate.

To call all of the Eagle Ford's production "oil" is like calling a moped an "auto" – technically true but misleading. American oil analyst Sandy Fielden said last year that "Gulf coast refiners need this stuff [condensate] like a hole in the head."

With Libya out of the picture, and monster Saudi fields struggling to keep production intact, Iraq, OPEC's second-largest producer, has emerged as the big potential swing producer. But as ISIL warriors move ever closer to Baghdad, the IEA has been busy trimming its forecasts for Iraqi production growth. It now expects capacity to reach 4.5 million barrels a day by 2019 – half of the Iraqi government's own forecast. Even if ISIL fails to take control of the rich oil-producing regions in the south, production is unlikely to rise. Note that the foreign oil companies, including BP, have been evacuating non-essential workers in Iraq. New investments in Iraqi oil infrastructure are unlikely if the country disintegrates.

Still, forecasts for a killer price spike are rare, barring the complete collapse of Iraqi production. But even if the Iraqi insurgency evaporates, oil prices are likely to rise as demand picks up and there proves to be less "oil" in U.S. shale oil than had been imagined.

Investors don't always get their big bets right. They bet wrong this year on U.S. Treasury yields – they fell instead. They may have bet wrong on stable oil prices too.