Oil Price Is Highest Since 2014 But Syria’s Geopolitical Black Hole Won’t Be Primary Market Driver
The inevitable happened late on Friday (13 April) night as U.S.-led air strikes targeted Syrian military sites in response to the country’s alleged chemical weapons attack on its own citizens, in a civil war that has been raging for over seven years and shows no signs of abating.
The predictable also happened contrary to the fears of some – as the attacks unfolded, no Russian assets, of which there are several in Syria under a pact between Presidents Bashar Al-Assad and Vladimir Putin, were harmed and the Russians did not engage any U.S., U.K or French aircraft involved in the operation despite threatening to do so.
For now, the way the events panned out overnight somewhat eases the risk premium driven upside for oil benchmarks. That said Syria has become a geopolitical Black Hole that has engulfed the Middle East, and sucked global powers and many nations into the hostile quagmire of a regional war.
U.S., U.K., France, Russia, Israel, Iran, Turkey and several Gulf Cooperation Council members such as Saudi Arabia and UAE are embroiled in a tragedy that is first and foremost that of Syria. Many subtexts and pretexts of all shapes and designs threaten to escalate things out of control. A Saudi-led group of Middle Eastern nations has boycotted Qatar accusing it of “state-sponsored terrorism.”
Iran seems to have formed a strategic unhindered corridor to the Mediterranean to its sympathizers in Lebanon in guise of Hezbollah fighters, and is involved in a proxy way in Yemen with the Saudis.
Islamic State’s (IS) influence may have waned but in the mess of Syria – distinguishing the good guys from the bad is next to impossible, with Islamist loonies of all descriptions toughing it out with an Assad regime propped up by Russia and Iran. Kurdish militia backed by the U.S. are fighting both Assad and the Islamists on the Syria and Iraq border.
The Kurds, in turn, are despised by NATO member Turkey, itself no friend of Assad. Such complications coupled with a decade of conflict in Iraq makes the Middle East a very dangerous part of the world. Alongside this, key OPEC crude producers have troubles of their own – Libya’s civil war rages on, Nigeria remains troubling, and Venezuela continues to disintegrate and suffer declines in production.
Yet, all of the aforementioned tensions, a projected uptick in Indian and Chinese crude demand, concerted cuts by OPEC and 10 non-OPEC oil producers to the tune of 1.8 million barrels per day (bpd), and Saudi hints at supporting a $80 oil price, have only managed to take the Brent front-month futures contract price to a Friday (13 April) close of $72.58 per barrel.
The price may rise over the short-term and the current level marks the global proxy benchmark’s biggest gain since November 2014. It is also the highest Friday closing price this year for Brent futures, but remains well below the mid-2014 price of over $115 per barrel.
The oil market’s risk premium is still not the default $10-15 per barrel add-on traders tended to factor in 2012, when musings about military action against Iran were all the rage, Syrian and Libyan civil wars were in their infancy, threatening to spiral out of control as they eventually did, and IS had not made incursions into Northern Iraq.
That’s because, unlike 2012, courtesy of rising U.S. oil and gas production, the tectonic plates of the market have shifted and so has the impact, magnitude and pricing per barrel of geopolitical risk.
What’s more having an abundance of domestic oil and gas, has not just materially altered U.S. foreign policy making it less interventionist and gung-ho, American exports have altered the dynamic of the global supply pool as well.
So where from here, and what impact could the growing Syrian mess have? Very little, unless Washington and Moscow engage or show signs of engaging in a proxy or direct conflict over Syria. In that unlikely event, all bets are off. For now all eyes should be on OPEC, inventories and demand.
According to the latest S&P Global Platts survey, OPEC is sticking to its cuts. The cartel’s oil output in March fell to 32.14 million bpd; its lowest level in 11 months, led by declines in seven out of the 14 member countries.
Supply disruptions in Venezuela and Angola along with steady falls in Saudi Arabia, Libya, Algeria and Nigeria dragged the cartel’s March output down by 250,000 bpd from February. The only OPEC countries to see a production rise were the UAE, Iraq and Ecuador.
All the while OECD inventories are showing signs of returning to their five-year average, even if U.S. crude production continues to rise, and is tipped to top that of Russia and Saudi Arabia this year by the International Energy Agency, and come in well above 10 million bpd for 2018, even by conservative estimates.
Predictably, so does the country’s rig count – up five rigs from last week to 1,008, with oil rigs up seven to 815, according to Baker Hughes. The U.S. rig count is also up 161 rigs from last year’s count of 847, with oil rigs up 132. The U.S. Offshore Rig Count is up 4 rigs to 16, giving an indication of the pace of US output.
Finally, a word on Syrian oil production is merited as well. The country’s contribution to the global supply pool just prior to its brutal going civil war was a negligible 380,000 bpd; well below a 2002 peak output of 680,000 bpd. It currently stands at a paltry 13,000 to 15,000 bpd, depending on which data aggregator you rely on, and much of it is allegedly ends up in the black market via Turkey on unconfirmed anecdotal evidence.
So a war of high stakes it might well be; but any suggestion that Syria is a resource-driven conflict or one that would have a direct impact on the supply pool are without merit.
Oil market drivers remain India’s voracious crude imports, China’s rising positivity, receding specter of global trade wars and OPEC’s rigid compliance with stated cuts stabilizing Brent above or near $70 on average, and the West Texas Intermediate above or near $65 on average for 2018.
The ongoing geopolitical kerfuffle is simply contributing to oil price upsides, but not driving it.