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The biggest threat to gas prices isn’t Putin, it’s Iraq, according to chief strategist- Newshubweek

The biggest threat to gas prices isn't Putin, it's Iraq, according to chief strategist
Written by Arindam

The biggest threat to gas prices isnt Putin its Iraq

When gas prices soared to a record high of over $5 per gallon in June, analysts and politicians were quick to blame Russia’s invasion of Ukraine.

The Biden Administration even called the surging fuel prices seen after the conflict “Putin’s price hike” at the time. In the months since, however, gas prices have dropped roughly 26%, even as the war continues to escalate.

Now, researchers from an alternative asset management platform called the ClockTower Group are arguing that Russia’s war isn’t the biggest risk to the recent decline in prices at the pump—Iraq is.

Marko Papic, the ClockTower Group’s chief strategist, notes that the U.S. is trying to get Saudi Arabia to increase its oil production, while simultaneously attempting to improve relations with Iran after the Trump administration walked away from the 2015 Iran nuclear deal. 

He argues that talking to both players—who are well-known adversaries— will only serve to exacerbate tensions between the two regional powers, which could ultimately lead to sectarian conflict in neighboring Iraq, the world’s fourth-largest oil exporter. And if Iraq’s crude production is affected by this conflict, oil prices will surely rise, with gas prices following close behind.

“The real risk to oil supply is the Iran-Saudi tensions, likely to dramatically increase as the U.S. struggles to keep both sides happy,” Papic wrote in a Monday report, adding that “Washington will have to choose one over the other.”

Bank of America’s commodity and derivatives strategist, Francisco Blanch, echoed Papic’s argument in a similar note on Monday, writing that he sees Brent crude oil prices, the international benchmark, averaging $100 per barrel in 2023 with “output disruptions” in countries like Iraq being a key upside risk.

A no-win scenario?

Papic believes the U.S. may be in a lose-lose scenario in the middle east. He argues that if the U.S. spurns Iran by accepting a deal with Saudi Arabia for more oil imports, it will force the country to retaliate in Iraq by backing militias to stir up violence in the region. He noted that Iran has, on four separate occasions this year alone, backed militias that have launched missiles at oil refineries and struck buildings near the U.S. consulate.

He also explained that Iraq has traditionally served as a “buffer state” between Iran and Saudi Arabia, adding that Iraq’s oil hub city, Basra, has already been the scene of Shia-on-Shia violence between Iran-aligned gunmen and Iraqis this year.

“At the moment, most investors are focused on Ukraine’s offensive in Kherson and Kharkiv as being relevant to oil prices. It may yet prove to be so, given a potential menu of likely reactions from Moscow,” Papic wrote. “However, the greatest risk to the global oil supply may be Shia-on-Shia conflict in Iraq…were the negotiations over the nuclear deal to fail.”

Negotiations over an Iran nuclear deal are rocky and unlikely to be resolved anytime soon. 

At the same time, if the U.S. strikes a deal with Iran, the world’s second-largest crude oil exporter, Saudi Arabia, will “undoubtedly be miffed,” Papic added. This puts the Biden administration in a damned-if-you-do, damned-if-you-don’t scenario.

“Our fear is that whichever choice the U.S. makes, somehow the blowback will end up on Iraq’s doorstep,” Papic argued. “Two regional powers duking it out in a ‘buffer state’ would normally not be something that investors would have to worry about. But this buffer happens to be the world’s fourth largest crude exporter.”

Papic made the case that the tensions between Iran and Saudi Arabia mean “Iraqi domestic politics will gain an outsized global importance” over the coming months.

“A civil war in the world’s fourth largest oil exporting nation would certainly add to the already ample amount of geopolitical risk premium in oil prices,” he added.

While Papic didn’t forecast where oil or gas prices should move from here, he did argue that betting against oil to make a quick profit no longer seems like a viable option for investors.

“For the time being, we have no way to gauge how this will play out in the markets. But with Brent [crude oil] prices already 26% off their June highs, the easy gains in the short oil trade may have been made,” he wrote.

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Arindam

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