Will military strikes push oil prices to record highs?

As politicians in the US and Europe move closer to launching military strikes in Syria, the uncertainty in the country and the prospect of further instability in the Middle East is being reflected in the financial markets.

In recent days, the price of oil has surged to a six-month high. A barrel of Brent crude jumped 6% to $117 on Wednesday, and compares with less than $100 a barrel as recently as June.

Analysts from the bank Societe Generale suggest the price could eventually surge to $125 if air strikes are launched, and $150 a barrel if the military action disrupts production in the region.

That would be beyond the all-time high of $147 a barrel seen at the height of the financial crisis in 2008.

Bank of America Merrill Lynch has forecast a spike in oil prices of $120-$130 a barrel.

This is despite the fact that Syria’s oil production itself is negligible to the global market.

Even before the crisis that now engulfs the country, Syria exported barely 150,000 barrels a day to foreign buyers – mainly the European Union.

That compares with 10 million barrels a day exported by Saudi Arabia, for example, and a global oil consumption rate of 92 million barrels a day.

When sanctions were imposed on the regime of President Bashar al-Assad in late 2011, the exports stopped, and Syria is now estimated to produce just 50,000 barrels per day, and all of it refined domestically.

Spread

But the concern among investors is that any Western involvement in Syria may draw neighbouring countries deeper into the fray, and the conflict may spill out beyond its borders.

That could include neighbouring Iraq, which produces a much more significant three million barrels of oil a day – 3% of global consumption.

In Baghdad there are already concerns about the spread of the conflict across its long and porous desert border with Syria.

Extremist groups from Iraq – particularly local al-Qaeda affiliates – are now operating in northern Syria.

At the same time there has been a significant rise in sectarian violence in Iraq in recent months, with hundreds dead and fears of an outright civil war between Shias and Sunnis renewed.

Finally the Kurds who run northern Iraq, and produce around 250,000 barrels of oil a day from its oil fields, have an interest in the welfare of their fellow Kurds living just over the border in the north-eastern corner of Syria.

Strait under threat

The other great unknown is how Iran may react to military strikes. It has proven to be a steadfast supporter of the Assad regime over the last two years, despite growing international pressure, and has provided military and financial support.

It has warned against military strikes, and Iran’s Supreme Leader Ali Khamenei said a Western attack would be a “disaster for the region”.

But it is not clear whether Iran’s response would go further than verbal condemnation, especially with recently installed President Hassan Rouhani – seen as more moderate than his predecessor Mahmoud Ahmadinejad – apparently keen to improve relations with the West.

But if there were a response this could threaten both Iran’s supply of 2.7 million barrels of oil per day, and the Strait of Hormuz.

The strait is a narrow body of water that separates Iran from the United Arab Emirates, and is the only point of access to the Persian Gulf.

It is also the busiest passageway for oil tankers in the world, with more than 17 million barrels (18% of global consumption) passing through it each day.

Iran has in the past threatened to close the strait, cutting off the supply of oil, if it was itself attacked by the US or Israel.

‘Tightest balance’

It also remains unclear what the impact on other major oil producers in the region could be. Saudi Arabia has already sided with the rebels trying to topple the Assad regime.

But despite the apparent risks of military strikes, oil analysts point out that the oil price has been creeping up for some time, long before the threat of military action in Syria became an imminent possibility.

The reasons have included disruptions to production, particularly in Libya, where a patchwork of armed militia groups still maintain control over much of the country. The lack of security has seen oil production regularly disrupted, while industrial action at Libyan ports has prevented exports.

At the same time demand for oil has increased as the US and Europe recover from recession, and demand from China has also held up.

Gary Ross, chief executive of US energy consultancy PIRA, described the current situation as “the tightest physical balance on the world oil market I’ve seen for a long time.”

Some analysts are more optimistic, and suggest that if oil prices do rise significantly, the spike will be temporary.

“The market is reassessing the supply implications of the conflict in Syria,” said Eugen Weinberg, an analyst at Germany’s Commerzbank.

“Our view is military action will not destabilise the whole Middle East, which means the risk premium is being overstated. If the conflict is contained in Syria, prices are too high.”

BBC