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Syria and the oil market vultures

September 08, 2013
Syria is not a major oil producer, yet, prospects of a regional contagion has been keeping markets on a tight leash. - File photo
Syria is not a major oil producer, yet, prospects of a regional contagion has been keeping markets on a tight leash. - File photo

RIYADH: As the world awaits the next moves of the world leaders on the geopolitical chessboard, crude markets appear confused and volatile.

Concern that a potential US strike on Syria would spread unrest and further disrupt Middle East crude supplies had boosted oil prices in recent weeks. However, things cooled down somewhat after Obama faced stiff resistance at the G20 summit against attacking Syria without UN Security Council endorsement. And with analysts reporting the vote in US Congress seeking green signal to go ahead against Syrian regime could go either way, crude market gains remained limited.

Markets were also shaky on account of the possible unwinding of the massive stimulus program by Federal Reserve.

Syria is not a major oil producer, yet, prospects of a regional contagion has been keeping markets on a tight leash.

As per some reports emanating from Washington, Tehran has ordered militants in Iraq to attack the US Embassy and other American interests in Baghdad in the event of a military strike on Syria.

On the other hand, Iraq is already struggling to contain the surge in sectarian insurgency, while the assassination attempt on the Egyptian interior minister has raised fears of long term instability and violence in Egypt too.

However, what if a military action against Damascus ultimately gets underway — despite the odds? Pundits seem divided — almost on ideological lines. Citing the current situation in Libya and Iraq — after military interventions — some are deeply concerned about the long term impact on oil markets and the instability that it might cause in the region. They are of the view that prices could easily go up to $125 to 130 or even beyond.

Others however, are stressing that any military action in Syria is more likely to cause prices to fall because markets have already risen in anticipation of a US intervention and there is little actual oil at risk in Syria.

If Syria’s civil war hasn’t already sparked an energy crisis, US intervention isn’t going to make a difference, good, old friend, Guy Caruso, the chief of the US Energy Information Administration during George W.

Bush’s government, was quoted as saying.

Caruso is also toning down the possible impacts of rising sectarian violence in Iraq on crude markets. It would have limited impact on the world market, he said.

“Pipelines get repaired pretty quickly,”

he stressed, adding “how much they could do is questionable.”

Caruso also expects Riyadh to step in with its spare capacity, in case an action is required. Similarly the oil-production boom in North Dakota and other states has gone a long way toward inoculating the United States against foreign oil shocks, Caruso underlined.

“The higher the run-up prior to the event (strike on Damascus), the greater the post-event decline,” underlined Morgan Stanley in a note last week.

In a study of major conflicts in the Middle East since the 1973 oil crisis, Morgan Stanley found that in most Middle Eastern conflicts — including when Israel bombed an Iraqi nuclear reactor in 1981 and the US-led invasion of Iraq in 2003 — oil prices were lower six months after the initial price surge.

Another reason some investors expect a drop in oil prices is the fact that markets tend to factor in geopolitical concerns before any event. The rise means there is potentially a greater risk of a price correction if money managers run for the exit at the same time.

And in the meantime, expectations are also growing that in case prices rise abruptly — release of crude from the US Strategic petroleum Reserve could also be expected.

While Syria remains gripped in turmoil, taking advantage of the situation, Israel has given exclusive exploration rights to a 153-square mile radius in the southern part of the occupied Golan Heights to a subsidiary — of the New York-listed company Genie Energy — advised by former vice president Dick Cheney and whose shareholders include Jacob Rothschild and Rupert Murdoch.

Vulture descends on the weak — even today.