Pundits are confused. Contradictory signals are keeping the crude markets volatile. Oil futures continued to swing back and forth, throughout the past week, as markets weighed, and indeed awaited the next moves of the world leaders on the geopolitical chessboard.
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, sentiments cooled down a bit after Obama faced open resistance from Russia, China, the European Union and some emerging market countries, during the G20 summit at St Petersburg, against striking Damascus without UN Security Council approval.
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 were mostly limited.
Markets were also shaky on account of the much anticipated unwinding of the massive stimulus program by Federal Reserve. Solid US jobs and service sector data released on Thursday also bolstered views the Fed could start slowing its bond-buying program as soon as this month, but plunging orders for factory goods highlighted uncertainty around the economic outlook. All these helped reduce ‘fear premium’ on crude markets.
Syria is not a major oil producer, yet, prospects of a regional contagion has been keeping crude markets on a tight leash. The prospect that other regional powers could get entangled into the web has helped crude markets firm up. 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. And while Iraq is already struggling to contain a surge in sectarian insurgency, 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? What impact would it carry on crude markets and for how long?
Pundits seem divided. And the divide is interesting – almost on ideological lines. Many are deeply concerned about the long term impact on oil markets and the entire oil rich region, and the instability that it might cause such as we see in Libya and Iraq today – after intervention by global powers.
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, says good, old friend, Guy Caruso, the chief of the US Energy Information Administration during George W. Bush’s government, who now works as a senior adviser at the Center for Strategic and International Studies. Any price effects from Syrian supplies are “already baked into the market,” Caruso said. “It’s almost impossible to assign any value to that.”
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 expected 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. History shows that when conflicts aren’t likely to directly affect oil supply, they can ultimately lead to even lower prices.
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.
“If this is a very quick thing and we lob a few Tomahawk missiles and destroy a few runways and nothing happens from there, then prices will easily come down $4 or $5,” Tariq Zahir of Tyche Capital Advisors LLC was quoted as saying. “I do think it’s basically priced in.”
Nicholas Johnson, of Pacific Investment Management Co., says the dwindling oil production in Libya, rather than fears about a spillover from US intervention in Syria, was largely responsible for the recent rise in oil prices. Once Libyan production comes back online, prices will likely fall, he said.
Brent net long positions—bets that prices will rise—rose to a record high in the week ended Aug. 27, according to IntercontinentalExchange Inc. 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. Jason Bordoff, a former White House energy official who now runs the Center on Global Energy Policy, said: “There is not a hard and fast trigger. But if we see prices up around $125, that is an indicator that there is tightness in the market, and possibly a problem caused by temporary disruption that could be eased by a release from strategic reserves.”
And while Syria remains gripped in turmoil, taking advantage of the situation, Israel has reportedly granted a US company the first license to explore for oil and gas in the occupied Golan Heights, Financial Times reported.
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 now have been given exclusive rights to a 153-square mile radius in the southern part of the Golan Heights by the Israeli government.
Israel seized the Golan Heights in the Six-Day War in 1967 and annexed the territory in 1981. Israel’s administration of the area - which is not recognized by international law - has been mostly peaceful until the Syrian civil war broke out 23 months ago.
“This action is mostly political - it’s an attempt to deepen Israeli commitment to the occupied Golan Heights,” Israeli political analyst Yaron Ezrahi told FT. “The timing is directly related to the fact that the Syrian government is dealing with violence and chaos and is not free to deal with this problem.”
Vulture descends on the weak – even today!
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