Syria worries won't have lasting effect on oil prices

Sept. 18, 2013
The prospect of US military intervention in Syria, whether a limited cruise missile attack of specific targets or a broader offensive against the government of Bashar Hafez al-Assad, appears to have frightened the excitable folks engaged in trading crude oil and refined products.

The prospect of US military intervention in Syria, whether a limited cruise missile attack of specific targets or a broader offensive against the government of Bashar Hafez al-Assad, appears to have frightened the excitable folks engaged in trading crude oil and refined products. So much so that oil prices have risen to the highest level since 2008.

Let's look at what is causing this price run-up. Also, is it something producers and consumers should be either a) happy or b) frightened about? What is causing all the concern, and what do experts on the commodities markets have to say?

As most of you know, President Obama had drawn a "red line in the sand" over which he promised, or at least implied, US intervention if the Syrian government used chemical weapons against his own people in the country's current civil war. Now it appears that Assad has used "nerve gas" multiple times, the most recent being an August attack against a rebel-held area with sarin gas, which resulted in the killing of an estimated 1,400 men, women, and children.

Obama waivered and waffled over retaliatory measures and finally passed the buck on to Congress to either approve or deny a US response. At this writing, it looks as if Congress will not sanction any attacks, but the White House is planning a media offensive in which it is trying to garner public support to pressure Congress.

It seems doubtful this will work. A Gallup Poll conducted Sept. 3-4 found that more than half of Americans (51%) are more likely to oppose than favor (36%) US military action against Syria. On Sept. 6, Citi Futures wrote that "Obama appeared to face a difficult task in convincing Congress to approve military action against Syria."

Citi Futures went on: "It's going to take some real persuasion to get even a minimal majority [in Congress]. And we see some risk of a British-style parliamentary revolt" [a reference to the UK Parliament's refusal to have Britain join the US in an attack on Syria].

"We have no idea of the actual odds of a strike, but we suspect that they are lower than what the crude oil market consensus seems to think they are," the Citi Futures report concluded.

The oil market is on edge because of a fear that the violence in Syria will spill over to other nations. Syria itself is not a major oil exporter. In fact, its production is down 85% since the conflict erupted. However, the sectarian strife could easily affect neighboring countries, such as Iraq, says Guy Caruso, a senior adviser in the energy and national security section at the Center for Strategic and International Studies, a Washington think tank.

"In a post-strike environment, the most likely supply impact would be on Iraq," says Caruso. "Sunni-Shite tensions would be exacerbated, which could affect Iraqi exports most likely through pipeline damage."

Another concern is Iran, an ally of the Assad government, which could be dragged into the strife in Syria. Iran and Syria are both allies to Hezbollah, which has established a foothold in Lebanon and poses a continuing threat to Israel. Iran and Iraq together account for around 20% of OPEC's output capacity.

Russian President Vladimir Putin has said his country will help Syria if it is attacked. What sort of help is open to interpretation, but any involvement by Russia could escalate the situation and take it beyond Syria's borders. This is why the oil market is watching the situation closely. Without Russian support, Assad might be more responsive to Western demands that he not use chemical weapons. However, the higher the price of oil, the greater the benefit to Russia and the Putin government, whose economic policies are fueled by oil revenues. Keeping the pot boiling in the Middle East assures higher oil prices, which has become an imperative of the Kremlin.

In its Sept. 3 US Research report, the analysts at Raymond James make a strong case that fears over sustained high oil prices are not justified. They point out that the wars in Iraq and Libya have demonstrated that oil prices tend to "roll over just as fast as they spike."

"We have seen this type of fear before – in 2003, and again in 2011," says the RJ report. "In the run-up to the invasion of Iraq in 2003, oil prices were in a steady uptrend. Prices peaked a few days before the invasion began and continued to slide thereafter. Sixty days after the invasion began, prices were 23% lower than at the peak. A similar pattern can be seen in the case of the NATO intervention in Libya."

RJ notes that case studies show that there is far less volatility in energy stocks than in oil prices themselves since equities tend to look past short-term commodity price movements.

The Economist has a different take. The publication says the threat of military intervention in Syria is just one reason for the bump in prices. It cites an analyst who believes that current oil prices broadly reflect fundamentals, namely that global demand has been rising in recent months and will continue to do so. In addition, problems are mounting on the supply side, where worker strikes and sabotage have hurt Nigerian, Iraqi, and Libyan oil production. Spare capacity is at its lowest level since 2008, which means oil prices will continue to rise.

Surprisingly, the Economist doesn't mention any impact of increasing North American crude production on global markets. That production recently enabled the Port of Houston to leap past New York as the top US exporter based on tonnage.