Chart of the Week : Iraqi oil production

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  Geopolitical risk is all over the place again in early 2020. The Iran-US cold war has replaced the China-United States trade war as investors' main concern. However, we don't think that the situation in the Middle East will lead to a spike in inflation, as feared by stock market bears.


Following the US killing of Soleimani, the situation has considerably deteriorated in the Middle-East. As a consequence of the US strike, the Iraqi parliament voted a non-binding resolution to expel the US military from the country. In reaction, the president Trump threatened to impose sanctions on Iraq without much elaboration. The market impact was immediate: Brent crude price is now back through $70, which corresponds to levels reached after the Aramco facility attacks last summer.

Bears have long feared that a stock market correction could be spurred by an inflation spike and that oil could be the trigger. It is admitted that skyrocketing oil tends to precede recession. However, we don’t see such a situation happens.

It is likely that president Trump is bluffing on Iraqi sanctions. It would be politically risky in a presidential election year to impose sanctions against Iraq, which is the OPEC’s second largest producer, with 4.7 million barrels of daily output. There is simply not enough global spare capacity to fill a gap caused by US sanctions targeting the Iraqi oil production. Higher oil prices would ultimately lead to a tax on US consumers.

In our view, the current market focus on oil price is misleading. We believe that economic damage related to the US-Iran cold war will more certainly come from cyber retaliation or from global uncertainty, with less direct consequences on the global economy.

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