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Iran, Iraq, Libya, Key Geopolitical Risks to Oil Price - PIMCO

The past year has seen a number of geopolitical tensions flare up that could potentially impede oil production in a number of key producing countries, according to a recent note from PIMCO.

Jan 21, 2020 // 6:30AM

Although the tensions brought about by the assassination of a high-ranking Iranian general have begun to subside, the broader backdrop in the MENA region still remains tenuous. Under the Trump administration, US-Iranian tensions have been building for some time, with the collapse of the Iranian nuclear deal and renewed US sanctions against Iran.

In neighbouring Iraq, a wave of protests against the government have prompted repressive measures from the government. The country’s position as a proxy between the US and Iran complicates the political dynamic further. The decision whether to renew a waiver to import gas from Iran could lead to energy problems in the run up to summer.

In Algeria, the ongoing political transition, whilst unlikely to escalate into conflict, has heightened uncertainty and hinder investment in the meantime.

“One of the most important and least-discussed oil market risks in our estimation is Libya, where discussions of a cease-fire between rival factions are currently underway. While output is at post-Gaddafi highs, recent heated fighting between the two competing governments and the failure so far of the international community to successfully mediate the conflict bode poorly for output stability.”

But despite these flashpoints, the de-escalation between the US and China on the trade front is supporting oil demand, and the overall environment is likely to buoy prices further.

“The oil market has remained sufficiently tight over the past year to remain in backwardation, supporting the prospect for positive returns from investing in oil… At the very least, investors should consider the diversification and tail risk hedging properties of a commodity investment.”

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