When gas prices soared to a record high of more than $5 a gallon in June, analysts and politicians were quick to blame Russia’s invasion of Ukraine.
The Biden administration even called the spike in fuel prices seen after the conflict “Putin’s price gouging” at the time. In the following months, however, gas prices fell by approximately 26%, even as the war continued to escalate.
Now, researchers at an alternative asset management platform called ClockTower Group say Russia’s war isn’t the biggest risk to the recent drop in pump prices — Iraq is.
Marko Papic, chief strategist at ClockTower Group, notes that the US is trying to get Saudi Arabia to increase its oil production while also trying to improve relations with Iran after the Trump administration pulled out of the Iran nuclear deal from 2015
He argued that talks with both players, who are well-known adversaries, would only serve to exacerbate tensions between the two regional powers, which could eventually lead to religious conflict in neighboring Iraq, the world’s fourth-largest oil exporter. . And if Iraq’s crude oil production is affected by this conflict, oil prices will surely rise and gas prices will follow.
“The real risk to oil supplies is tensions between Iran and Saudi Arabia, which are likely to increase dramatically as the U.S. struggles to keep both countries happy,” Papich wrote in a Monday report, adding that “Washington will have to choose one before the other’.
Bank of America commodities and derivatives strategist Francisco Blanch echoed Papich’s argument in a similar note on Monday, writing that he sees Brent crude prices, the international benchmark, averaging $100 a barrel in 2023 with “production disruptions ‘ in countries like Iraq a key upside risk.
A no-win scenario?
Papich believes the US may be in a losing scenario in the Middle East. He argued that if the US rejected Iran by accepting a deal with Saudi Arabia for more oil imports, it would force the country to retaliate in Iraq by supporting militias to fuel violence in the region. He noted that on four separate occasions this year alone, Iran has supported militias that have fired rockets at oil refineries and struck buildings near the US consulate.
He also explained that Iraq has traditionally served as a “buffer state” between Iran and Saudi Arabia, adding that the city of Basra, Iraq’s oil hub, has already been the scene of Shiite violence between pro-Iranian gunmen and Iraqis this year. .
“Currently, most investors are focused on Ukraine’s offensive in Kherson and Kharkiv as relevant to oil prices. It may yet turn out to be the case, given the potential menu of possible reactions from Moscow,” Papich wrote. “However, the biggest risk to global oil supplies could be the Shiite conflict in Iraq … if the nuclear deal talks fail.”
Negotiations on the Iran nuclear deal are shaky and unlikely to be resolved soon.
At the same time, if the U.S. struck a deal with Iran, the world’s second-largest crude oil exporter, Saudi Arabia, “will no doubt be irritated,” Papich added. This puts the Biden administration in a damned if you do, damned if you don’t scenario.
“Our concern is that whatever choice the US makes, somehow the blowback will end up at Iraq’s doorstep,” Papich said. “Two regional powers running it in a ‘buffer state’ would not normally be something investors need to worry about. But that buffer happens to be the world’s fourth largest exporter of crude oil.”
Papic pointed out that tensions between Iran and Saudi Arabia mean that “Iraq’s domestic politics will take on extraordinary global importance” in the coming months.
“A civil war in the world’s fourth largest oil exporting nation would certainly add to the already huge geopolitical risk premium in oil prices,” he added.
While Papich doesn’t predict where oil or gas prices should go from here, he says betting against oil for a quick profit no longer looks like a viable option for investors.
“At the moment we have no way of judging how this will play out in the markets. But with Brent [crude oil] prices are now 26% off their June highs, the easy profits in shorting oil may have been achieved,” he wrote.
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