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

When gas prices rose to a record high of more than $5 a gallon in June, analysts and politicians are quick to blame Russia’s invasion of Ukraine.

The Biden Administration even called the increase in fuel prices seen after the conflict “Putin’s price hike” at that time. In the months since, however, gas prices have fallen by nearly 26%, despite the war continues to rise.

Now, researchers from an alternative asset management platform called ClockTower Group argue that war with Russia is not the biggest risk of the recent drop in bomb prices—Iraq.

Marko Papic, the chief strategist at ClockTower Group, says that the US is trying to get Saudi Arabia to increase its oil productionwhile simultaneously trying to improve relations with Iran after the Trump administration left from 2015 Iran nuclear deal.

He argued that talks between the two players—known adversaries—would only serve to exacerbate tensions between the two regional powers, which could eventually lead to sectarian conflict in neighboring Iraq, the fourth largest oil exporter. And if Iraq’s crude oil production is affected by this conflict, oil prices will certainly rise, with gas prices following suit.

“The real risk to oil supply is Iran-Saudi tensions, likely to escalate sharply as the US struggles to keep both sides happy,” Papic wrote in a report on Monday, adding that “Washington must 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 the price of Brent crude oil, the international benchmark, averaging. $100 per barrel in 2023 with “output disruptions” in countries such as Iraq a key risk factor for the increase.

A no-win scenario?

Papic believes that the US could be in a losing scenario in the middle east. He argued that if the US rejects Iran by accepting a deal with Saudi Arabia for more oil imports, it will force the country to retaliate against Iraq by backing militias to fuel violence in the region. . He noted that Iran, on four separate occasions this year alone, has backed militias with launched missiles 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 Iraq’s oil hub city, Basra, has become the scene of Shia-on-Shia violence between Iran-aligned gunmen and Iraqis this year.

“At the moment, most investors are focused on the offensive in Ukraine in Kherson and Kharkiv related to the price of oil. It may prove more, given a potential menu of possible reactions from Moscow,” Papic wrote. “However, the biggest risk to global oil supplies could be the Shia-on-Shia conflict in Iraq … is the nuclear deal negotiations. to fail.”

Negotiations over a nuclear deal with Iran rocky and unlikely to be resolved anytime soon.

At the same time, if the US negotiates with Iran, the second largest exporter of crude oil in the world, Saudi Arabia, “will undoubtedly be angry,” added Papic. This puts the Biden administration in a damned-if-you-do, damned-if-you-don’t scenario.

“Our fear is that whatever choice the US makes, somehow the blowback will end up at Iraq’s door,” Papic argued. “Two powers in the region putting it out in a ‘buffer state’ is usually not something investors should worry about. 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 politics of the country in Iraq will take on a greater importance in the world” in the coming months.

“The civil war in the fourth largest oil exporting country in the world will add a significant amount of geopolitical risk premium to the price of oil,” he added.

While Papic doesn’t predict where oil or gas prices should move from here, he argues that betting against oil to make quick profits seems like a viable option for investors.

“Right now, we have no way of knowing how this will play out in the markets. But for Brent [crude oil] prices 26% of their highs in June, the quick development of the short trade in oil may have been done,” he wrote.

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