August 30, 2013

Syria Strike by U.S. Likely to Push Oil Prices Higher

Protests, like this one in Tunisia, erupted Friday against U.S. military intervention in Syria. (Photo: AP) Protests, like this one in Tunisia, erupted Friday against U.S. military intervention in Syria. (Photo: AP)

While Syria is itself not a major oil producer, any military strike by the United States on Syria in retaliation for the Assad regime’s suspected chemical attacks would likely increase oil prices worldwide.

The reason is that an American military intervention into the country’s civil war might disrupt oil deliveries in the Mideast, especially in the Suez Canal, through which close to three million barrels of total oil (crude oil and refined products) travel daily (according to the U.S. Energy Information Administration for 2012). The Iranian government has also suggested that an American attack could lead to a retaliatory strike on Israel, which is rushing to distribute gas masks to its population.

In a televised press conference early Friday afternoon, U.S. Secretary of State John Kerry said the evidence was “clear and compelling” that the regime of Syrian President Bashar al Assad had in fact used chemical weapons in an attack on Syrian opposition-controlled neighborhoods outside Damascus on Aug. 21. Calling Assad “a thug and a murderer,” Kerry said 1,429 Syrians, including many civilians and hundreds of children, were killed in that attack last Wednesday, and that the regime had used chemical weapons on its own people multiple times this year. (The government has made available a document relating its evidence of the attack.)

While Kerry did not say the U.S. would take military action, he said the U.S. would “make decisions on our own timeline,” and that the administration would consult with Congress on any potential action. He did say any response would be "limited and tailored," would not involve “boots on the ground,” nor would it be “open ended” and that the U.S. would “not take responsibility for a civil war” that’s already under way. While he acknowledged that “the American people are tired of war,” he also said that “fatigue doesn’t absolve us of the need to take action.”

President Barack Obama is scheduled to fly to St. Petersburg, Russia, for a meeting of the G20 on Tuesday, so speculation is already rife that any military action would take place before then.

As Kerry spoke, the markets responded quickly. As of 1:30 p.m. Eastern time, the S&P 500 was down slightly, the Dow fell and then rebounded, gold and silver fell and oil (WTI) was down slightly at $107.

The U.S. Energy Information Administration estimates that Syria produced 387,000 barrels of crude oil a day in 2010, and that it exported 109,000 barrels a day, more than 90% of which went to European countries like Germany, Italy, France and the Netherlands. While Syrian crude accounted for only 1.35% of European Union imports, according to the European Commission, those exports accounted for 30% of the Syrian government’s revenues in 2010.

The CIA World Factbook puts Syria’s proven oil reserves at 2.183 billion barrels as of January 2012, which puts the country’s reserves in 35th place (for comparison, the U.S. is ranked 15th and the U.K. is ranked 32nd).

Richard Barrington, a CFA and former executive committee member at Manning & Napier Advisors and now a personal finance expert for MoneyRates.com, wrote in a note today that “for a fragile economy, the Syrian conflict has the potential to be a very disruptive event.” That disruption, Barrington wrote, would come from inflation prompted by higher oil prices.

Oil prices have been steadily rising this year already. On Wednesday, West Texas Intermediate (WTI) reached a two-year high, while Brent oil reached a six-month high. Prices fell somewhat on Thursday as the British Parliament’s vote to not go alon with an American military strike seemed to temper fears of such a strike.

As of midday Friday, oil prices were falling slightly according to Bloomberg, ostensibly because of eased concerns about an American strike on Syria, with WTI for October delivery down 0.61% to $108.41 and Brent crude for October down 0.28% to $114.97.

The VIX, however, has risen 4.22% to 17.52 (up from Thursday’s close of 16.81) as of 12:00 PM EST; it opened the month at 13.45.

“If the situation in Syria becomes less of a civil war and more of a multinational conflict, it could really send oil prices spiraling,” warns Barrington, “if only on speculation more than any actual shortage." 

Addison Armstrong of Tradition Energy, an energy research and advisory firm, told The Associated Press that “the issue, of course, is not Syria itself but certainly, factions within Syria that are clients of Iran."

Adam Wise, a managing director at Manulife Asset Management in Boston, told Bloomberg that "as long as tension escalates in the region, specifically in Syria and Iran, you can expect prices to move higher. More news-driven price spikes are on the table.” 

The noted investor Jim Rogers, chairman of Rogers Holdings, told Reuters that he owns oil and gold, and said he is bullish on commodities in general. “If there is going to be a war, and it sounds like America's desperate to have a war,” he told the news service, commodity prices “are going to go much, much higher.”

Keith SpringerSome observers are less sanguine. Keith Springer (left) of Springer Financial Advisors in Sacramento, Calif., admitted in a note today that investors "are always spooked by war, especially when it concerns the Middle East." While August has been "the worst month for stocks in over a year," prompted by prospects of the Federal Reserve tapering quantitative easing and a wider Syrian war, Springer believes that "it is my bet that none of these potential disasters will materialize and this pullback will prove to be just another buying opportunity."

However, Springer reports that August has been the worst performing month for the stock market "each and every year" for the past 25 years, and that 2013 "will likely make it 26." September is usually not a good month for stocks either, he says.  

Now that the corporate earnings season is over, Springer believes investors' emotions "will be moved by headlines: war with Syria, the Fed's tapering concerns, and another edition of the ridiculous budget negotiations between the White House and Congress." However, he concludes that "what we have going for us is the strong calendar cycle we are now entering. If we are supposed to 'sell in May and walk away,; then we are to buy in September for a strong 4th quarter."

One beneficiary of a potential strike is U.S. defense contractor Raytheon (RTN), whose stock has risen 34% over the past year; it closed Thursday at $75.68.

Page 1 of 2
Single page view Reprints Discuss this story
This is where the comments go.