Iraq's Political Crisis Is Far From Over

The political crisis in Iraq is far from over. There is more violence to come, despite the withdrawal of protesters from Baghdad’s Green Zone earlier this week after two days of violence that killed 30 people and wounded hundreds more. As of Thursday, the violence had moved to the south–to Iraq’s oil-producing governorate of Basra. Four had been killed as of the time of writing after gunmen attacked government buildings housing security forces in the city of Basra.

Violence in Baghdad is one thing, and has the potential to mildly move markets as fears increase of threats to the oil industry in OPEC’s second-largest producer nation. Violence in Basra–the heart of Iraqi oil–is quite another thing. 

This is not a separate incident from what has happened in Baghdad, and that is significant. This is a spreading of the political unrest in Baghdad as rival Shi’ite groups vie for power. The clashes both in Baghdad and Basra are between al-Sadr supporters and pro-Iranian Shi’ite factions. Two of the dead were members of the Peace Brigades militia, loyal to al-Sadr. Both Baghdad and the south are dominated by Shi’ites. 

In the meantime, oil prices this week have dropped significantly, unphased by the situation in Iraq so far, or the resumption of violence last week in Libya, though instability in both venues could put upward pressure on prices in a tight market. Oil prices rallied last week on comments from the Saudi oil minister about the potential for output cuts, but this week, it’s all about China’s manufacturing data, more COVID lockdowns, sustained Russian exports, coming Fed rate hikes, and slowing economic growth–all of which are putting downward pressure on prices. China’s official manufacturing data released on Wednesday showed shrinkage in factory activity in tandem with a rise in COVID cases, putting the sector into contraction in August and adding to fears of a slowdown in oil demand. Iran barrels and the next OPEC+ meeting on September 5th remain the wild cards. Traders will be looking for any indications that OPEC might now reduce supply, which would immediately see oil prices rally.