Download Christopher Granville's Global Political Driver note "Petrogeddon"

From oil price war to possible shooting war – via Iraq

  • The timescale in which the oil price war could rage before one of the belligerents blinks may be longer than some more vulnerable oil producers can survive.
  • Already close to political collapse before the outbreak of the oil price war, Iraq is now at serious risk of being pushed over the brink.
  • This risk may appear to be mitigated by our view that the OPEC+ fiasco was an accident that belies continued alignment of fundamental incentives.
  • Now landed in a non-cooperative play, however, the belligerents can find the rationale and the means to dig in for long attrition.
  • The pain for the US shale oil industry may lead Trump to mediate – and a hint of this has already relieved some pressure on the oil price.
  • But any such breakthrough will likely depend on more visibility about the scale of the coronavirus-driven demand shock.
  • An optimistic timeline of three months before any ‘oil peace’ feelers may be too long for Iraq to hold without breakdown and conflict driven by Shia militants with Saudi Arabia itself in their sights.
  • This dramatic potential side effect of the COVID-19 crisis creates a structural buy-on-weakness case for oil – and there will no lack of weakness.
  • The elevated risk of new Mid-East conflict makes gold a candidate to lead the way back to normal asset price correlations.