A US judge ruled that a disputed tanker carrying Kurdish crude oil could not be seized by American officials as it was too far from the American shore.
The United Kalavrvta Tanker was anchored in the Gulf of Mexico, around 60 miles from Texas coast, meaning the Texas court did not have jurisdiction.
Federal magistrate Nancy K Johnson had previously ordered US Marshals to seize the ship's cargo. But the judge has now called for the dispute between Iraq's central government and the autonomous region of Iraqi Kurdistan to be resolved in Iraq.
Baghdad filed a lawsuit with a US court on Monday, claiming that Kurdistan sold the crude oil without permission from the central government, in violation on the Iraqi constitution.
Kurdistan has insisted that it has the right to sell oil produced in its territory without Baghdad's approval.
Mindful that Baghdad has been weakened by a fierce insurgency and is at risk of breaking up, Washington has warned companies against buying oil directly from Iraqi Kurdistan.
The tanker is thought to be carrying around 1 million barrels of crude oil, worth about $100m.
The Kurdistan Regional Government (KRG) has taken increasingly bold steps to break away from Baghdad in recent months.
Having completed an oil pipeline from KRG territory to Turkey, the Kurds have loaded a number of tankers at the Mediterranean port of Ceyhan in a bid to sell oil on international markets.
One of these attempts has proved successful, after a tanker unloaded its cargo at the Israeli port of Ashkelon in June.
However, fierce opposition from Iraq's central government has stifled other moves to sell oil.
Baghdad has filed lawsuits against Turkey for assisting the Kurds, while it has also warned governments that it would take legal action if a port accepted a cargo of Kurdish crude.
Meanwhile, Baghdad is facing a grave political crisis as Sunni militants, led by the Islamic State, tighten their grip on northern Iraqi cities.
With central government security forces on the defensive in the north, Kurdish militias secured the key city of Kirkuk, while the KRG leadership has called for a referendum on independence.