Putin is not the biggest threat to gas prices. It’s this country instead, according to a chief strategist

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When gas prices soared to a record high of over $5 a gallon in June, analysts and politicians quickly blamed the Russian invasion of Ukraine.

The Biden administration even called the rising fuel prices seen after the conflict “Putin’s price hike”. However, in the months since, gas prices have fallen by about 26%, even as the war continues to escalate.

Now researchers at an alternative wealth management platform called the ClockTower Group argue that the war in Russia is not the biggest risk to the recent price drop at the pump – Iraq is.

Marko Papic, the chief strategist for the ClockTower Group, notes that the US is trying to get Saudi Arabia to increase its oil production, while at the same time trying to improve relations with Iran after the Trump administration pulled out of the nuclear deal with Iran of 2015.

He argues that talking to both players – who are known opponents – will only 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 output is affected by this conflict, oil prices are sure to soar, with gas prices closely following.

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

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

A no-win scenario?

Papic believes the US is in a lose-lose scenario in the Middle East. He argues that if the US rejects 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 fuel violence in the region. He noted that this year alone, Iran has supported militias on four separate occasions that have fired missiles at oil refineries and hit buildings near the US consulate.

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

“Right now, most investors are focused on Ukraine’s offensive in Kherson and Kharkov as relevant to oil prices. It may still turn out to be so, given a possible menu of likely responses from Moscow,” Papic wrote. “However, the biggest risk to global oil supplies could be the Shiite conflict in Iraq… if the nuclear deal negotiations failed.”

Negotiations on a nuclear deal with Iran are difficult and unlikely to be resolved anytime soon.

At the same time, if the US strikes a deal with Iran, the world’s second largest exporter of crude oil, Saudi Arabia, will “no doubt be angry,” Papic added. This puts the Biden administration in a damn-if-you-do, damn-if-you-don’t scenario.

“Our fear is that whatever choice the US makes, the backlash will somehow end on Iraq’s doorstep,” Papic argued. “Two regional powers fighting it out in a ‘buffer state’ normally wouldn’t be something for investors to worry about. But this buffer happens to be the fourth largest exporter of crude oil in the world.”

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Papic claimed that tensions between Iran and Saudi Arabia mean that “Iraqi domestic politics will take on excessive global importance in the coming months”.

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

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

“For the time being, we cannot estimate how this will play out in the markets. But with Brent [crude oil] prices are already 26% below their June high, the easy gains in the short oil trade have been made possible,” he wrote.

This story was originally on Fortune.com

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