What the US strike on Syria could mean for oil

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Khalid al Falih Saudi Arabia

REUTERS/Hamad I Mohammed

Saudi energy minister Khalid al-Falih.

Oil prices spiked after the United States launched 59 cruise missiles at Shayrat airfield in Syria and nearby military infrastructure controlled by Syrian President Bashar al-Assad, in response to a chemical attack that killed at least 80 people in the northwestern part of the country on Monday.

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Both West Texas Intermediate crude, the US domestic benchmark, and Brent crude, the international benchmark, climbed to one-month highs in overnight trade.

The oil price spike happened even though there is no significant short-term supply disruption, given that Syria's oil production had already mostly gone offline amid the ongoing conflict, which has wreaked havoc on the country's economy.

But if the crisis intensifies, there could be consequences for other major oil players like Russia and Iran.

"The upshot is that whilst increased tensions in the Middle East could support the prices of oil and gold in the short term, we expect fundamentals to reassert themselves as the main driver of prices over the remainder of the year," Thomas Pugh, commodities economist at Capital Economics, wrote.

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"As such, the jump in the prices of oil indicates that investors are concerned about the potential for the conflict to escalate to major producers nearby," he wrote. "Indeed, the big fear [among investors] seems to be that this military strikes suggests that President Trump could be taking a more interventionist approach to the region."

Helima Croft, global head of commodity strategy at RBC Capital Markets, argued in a note to clients that although there are no major short-term production outage risks, there remain a couple longer-term questions to keep an eye in relation to energy markets.

First, could new strains between Russia and the Gulf Cooperation Council states emerge, which could then derail future cooperation on oil policy? Second, could the US strikes upend the dynamics of Iran's upcoming presidential elections?

On the first question, Russia has so far been able to maintain support for Assad and warm relations with Iran while cooperating on energy policy with GGC countries, including Saudi Arabia. Most recently, Russia joined in on the OPEC production cut.

Russian President Vladimir Putin himself came out in favor of coordinating with the cartel back in October amid the continued corrosiveness of lower oil prices. Reuters later reported that Putin played a "crucial role" as an intermediary between Iran and Saudi Arabia to get the OPEC deal done in November.

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"Therefore, Syria was not an intractable obstacle for Moscow in working with key Sunni states. However, it will be important to watch whether Syria does emerge as something of a deal breaker in the wake of the conflict's altered dynamics," according to Croft.

As for the second point, regarding Iran's elections, Croft wrote (emphasis ours):

"The conventional wisdom to date was that President Rouhani would be able to secure a second term with the implicit support of the Supreme Leader despite the rising criticism of the nuclear deal from the conservative quarters and growing public disenchantment with the more modest economic dividend from the deal due to residual sanctions. A key question now is whether Khamenei decides to tip the scales in favor of a more hardline candidate in light of Iran's strong support for Assad, most notably the weapons and manpower provided by the Revolutionary Guard's Quds Force to the Syrian strongman. The nuclear deal and the sanctions relief that enabled the return of Iranian oil exports would certainly be imperiled if Rouhani were defeated by a candidate with more hawkish/anti-American credentials."

Croft added that if the strike on Syria proves to be a one-off event and there are no serious efforts to put Assad out of power, then neither a conflict with Russia or a shift in Iranian politics is likely to transpire, and implications for oil should then remain relatively muted.

"However, given that President Trump had previously signaled deep disdain for humanitarian interventions and the Middle Eastern military engagements, we are now in uncharted waters and we think that many of our earlier prevailing assumptions about the implications of the conflict in Syria may be upended," she added.

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WTI crude is up by 0.9% at $52.15 per barrel, while Brent crude is up by 0.6% at $55.20 as of 1:42 p.m. ET.

Get the latest Oil WTI price here.

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