When fuel costs soared to a file excessive of over $5 per gallon in June, analysts and politicians have been fast in charge Russia’s invasion of Ukraine.

The Biden Administration even known as the surging gasoline costs seen after the battle “Putin’s price hike” on the time. In the months since, nonetheless, fuel costs have dropped roughly 26%, even because the conflict continues to escalate.

Now, researchers from another asset administration platform known as the ClockTower Group are arguing that Russia’s conflict isn’t the largest danger to the current decline in costs on the pump—Iraq is.

Marko Papic, the ClockTower Group’s chief strategist, notes that the U.S. is attempting to get Saudi Arabia to extend its oil manufacturing, whereas concurrently trying to enhance relations with Iran after the Trump administration walked away from the 2015 Iran nuclear deal. 

He argues that speaking to each gamers—who’re well-known adversaries— will solely serve to exacerbate tensions between the 2 regional powers, which might in the end result in sectarian battle in neighboring Iraq, the world’s fourth-largest oil exporter. And if Iraq’s crude manufacturing is affected by this battle, oil costs will certainly rise, with fuel costs following shut 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, including 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 an analogous notice on Monday, writing that he sees Brent crude oil costs, the worldwide benchmark, averaging $100 per barrel in 2023 with “output disruptions” in nations like Iraq being a key upside danger.

A no-win state of affairs?

Papic believes the U.S. could also be in a lose-lose state of affairs within the center east. He argues that if the U.S. spurns Iran by accepting a cope with Saudi Arabia for extra oil imports, it’ll power the nation to retaliate in Iraq by backing militias to fire up violence within the area. He famous that Iran has, on 4 separate events this yr alone, backed militias which have launched missiles at oil refineries and struck buildings close to the U.S. consulate.

He additionally defined that Iraq has historically served as a “buffer state” between Iran and Saudi Arabia, including that Iraq’s oil hub metropolis, Basra, has already been the scene of Shia-on-Shia violence between Iran-aligned gunmen and Iraqis this yr.

“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 quickly. 

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

“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 imply “Iraqi domestic politics will gain an outsized global importance” over the approaching 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 the place oil or fuel costs ought to transfer from right here, he did argue that betting towards oil to make a fast revenue now not looks like a viable possibility for buyers.

“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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