Hints of Syria strike fuelling oil spike

Simon Wardell, Senior Energy Analyst at IHS Energy, talks about the oil price spike and Syria.

Key messages:

• At present the price spike is about what a strike may ultimately lead to, and the additional risks to the region.
• The strike, if isolated and limited, would have very little impact on physical crude markets.
• Even if Syria sought retaliation, it is hard to see how they could physically disrupt supplies unless enlisting Iran and/or undertaking extreme actions (their responses are likely limited to Syria, Lebanon and possibly deniable attacks in Israel at present – in addition to the use of Hizbollah/Hamas).

Analysis and outlook

The heightened risk of attack on Western personnel In Iraq and elsewhere in the region could reduce the pace of oil development in Iraq marginally, but given existing security concerns it is unlikely to really disrupt ongoing operations.

Risk of intervention increasing prices

The price impact is really one of additional risk right now. US and UK remarks increase the likelihood of intervention, and intervention increases the likelihood of escalation and the conflict widening. While it may still need several steps to translate this into problems in the Gulf, Iraq or Iran, that is where the additional price premium comes in. These are unlikely, but markets respond to the overall risk profile – and military intervention certainly increases the risk.

Markets responding to nightmare scenario

Markets are responding not to an immediate threat, but to a possible nightmare scenario of a much more substantial regional conflict. A very small chance of this occurs – but it would massively impact prices if it did. How do you put an insurance premium on the risks of an unlikely event with massive potential ramifications? That’s where oil markets stand right now.

If strike occurs, prices to rise

We would consequently expect more oil price rises in the short-term if a strike occurred, but that this would gradually subside if the response proved limited, and could in fact fall more sharply if it became apparent that Syria lacked the ability (or will) to widen the conflict substantially in the days following any strike. It would be difficult for Syria or Iran to take immediate and proportionate retaliatory actions that really disrupt oil supplies, but a strike takes us one step further along the path towards a point where they might.

Adapted from a press release by David Bizley

Read the article online at: https://www.oilfieldtechnology.com/drilling-and-production/29082013/hints_of_syria_strike_fuelling_oil_spike/