When gas prices rose to a record high of over $5 a gallon in June, analysts and politicians were quick to blame Russia’s invasion of Ukraine.
The Biden Administration even called the soaring fuel prices seen after the conflict “Putin’s price gouging” at the time. In the months since, however, gas prices have fallen by about 26%, even as the war escalates.
Now, researchers from an alternative asset management platform called the ClockTower Group are arguing that the biggest risk to the recent drop in prices at the pumps isn’t the Russian war — it’s Iraq.
Marko Papic, chief strategist of the ClockTower Group, notes that the United States is trying to get Saudi Arabia to increase its oil production, while at the same time trying to improve relations with Iran after its administration Trump withdraws from the 2015 Iran nuclear deal.
He insists that talking to the two players – who are highly regarded – will only increase tensions between the two regional powers, which could lead to sectarian conflict in neighboring Iraq, the world’s fourth-largest oil exporter. . And if this conflict has an impact on Iraq’s crude production, oil prices will certainly rise, with gas prices close behind.
“The real risk to oil supplies is the tension between Iran and Saudi Arabia, which is likely to escalate sharply as the United States struggles to keep both sides happy,” Papic wrote in a report Monday. adding that “Washington will have to choose one over the other.”
Bank of America commodities 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 a barrel in 2023 to “disrupt outputs” in countries such as Iraq. main upside risk.
No win situation?
Papic believes that the US may be in a losing position in the middle east. He claims that if the US discourages Iran by agreeing to a deal with Saudi Arabia for more oil imports, it will force the country to turn against Iraq by supporting militias to fuel violence in the region. He noted that Iran, four separate times this year alone, has supported militias that launched missiles at oil refineries and hit buildings near the US consulate.
He also explained that Iraq has traditionally acted as a “buffer state” between Iran and Saudi Arabia, adding that Iraq’s oil hub, Basra, was already the scene of Shia-on-Shia violence between gunmen-aligned Iran and Iraq this year. .
“At the moment, most investors are focused on Ukraine’s aggression in Kherson and Kharkiv as something related to oil prices. It may still be the case, given a possible menu of likely reactions from Moscow,” Papic wrote. “However, the biggest risk to global oil supplies may be a Shia-on-Shia conflict in Iraq … if the nuclear deal negotiations fail.”
Iran nuclear deal negotiations are rocky and unlikely to be resolved anytime soon.
At the same time, if the U.S. violates an agreement with Iran, the world’s second-largest crude oil exporter, Saudi Arabia, “will definitely not,” Papic added. This puts the Biden administration in a damned-if-you-do, damned-if-you-don’t situation.
“Our fear is that whatever choice the United States makes, somehow the blow will come back to the doorstep in Iraq,” Papic insisted. “Ordinarily investors would not have to worry about two regional powers if it were placed in a ‘buffer state’. But this buffer happens to be the fourth largest exporter of crude oil in the world.”
Papic made the case that tensions between Iran and Saudi Arabia mean that “the domestic politics of Iraq will be of great global importance” in the coming months.
“Civil war in the world’s fourth largest oil exporting nation would certainly add to the high geopolitical risk premium in oil prices,” he said.
While Papic did not predict where oil or gas prices should move from here, he argued that betting against oil to make a quick profit no longer appears to be a viable option for investors.
“At the moment, we have no way of estimating how this will play out in the markets. But with Brent [crude oil] “prices are already 26% off their June highs, the easy gains in the short oil trade could be done,” he wrote.
This story originally appeared on Fortune.com