Syrian Conflict Boosts Oil Prices

Brian Hicks

Written By Brian Hicks

Posted August 28, 2013

The Syrian conflict could lead to World War Three.

It’s a provocative statement, I know, but if you’re an oil investor, this is something you need to know.

When it comes to the Syrian civil war, U.S. intervention is no longer a matter of if…but when.

oil price Nov 30After unconfirmed reports last week that the Assad regime had used chemical weapons against rebels and citizens, there is talk of U.S. interference – a primary factor that is driving up oil prices on the market.

Syria is not a major oil producer, but there is a concern that the chaos there could spill across neighboring borders. Syria shares borders with Iraq, the second largest OPEC producer, along with Jordan, Turkey, Israel, and Lebanon.

We’ve been down this road before with interferences in Iraq and Libya, but Syria is different, since major powers like Iran and Russia can become more entrenched in this conflict.

And if all of these major players become further entangled in Syria, this will not only escalate long-term uncertainty in the markets across the board, but it will keep oil prices higher.

Investors are already skittish, with the markets showing massive sell-offs and a general air of uncertainty.

The truth is we don’t know what’s going to come out of this conflict – we can only go by how the market is reacting.

WTI crude hit $109.01 and Brent rose to $114.36 as of Wednesday morning.

Analysts predict that prices could surge as high as $20 to $40.

How Long will High Energy Prices Last?

The reason why oil prices are high is not because of Syria, but because of U.S. grandstanding.

The civil war in Syria is more than just an event that will temporarily bump up oil prices. Syria could be the launching point of a regional conflict that could involve Iran – something that could cause a lengthy degree of uncertainty in the markets.

Iran has a loyal following in Syria in the form of business and political ties.

Iran has been crippled by sanctions, but it is still an oil powerhouse. If Iran becomes drawn into the conflict, prices could go as high as $120, and in the event of wide-scale conflict, I would say they’d head toward the $140 range, similar to what we saw in 2008.

Russia and Iran have already issued stern warnings against U.S. involvement in Syria.

On a geopolitical level, U.S. interests hope to isolate Iran by taking down its allies in the Middle East. Iran is a staunch ally of Syria, and if the Ayatollahs decided to retaliate in any way, it would be just the pretext the West needs to make a physical attack against the Persian nation. And let’s also factor in Russia’s support of the Assad regime and the already frosty relations between Putin’s regime and the Obama administration.

What we will have is a potential powder keg that could eventually lead to regional strife or possibly worse, which is why I believe this is one instance in which traders are justified in their nervousness.

The markets are concerned because of U.S. reactions to chemical weapons reports, but I think it’s worth noting that there is no incontrovertible evidence that Syrian President Bashar al-Assad used chemical weapons against his own people – no matter what the politicians are saying.

In fact, the UN previously reported that the Syrian rebels may be the ones using chemical weapons.

But we’re already hearing the drumbeat of war from pundits and high-ranking officials like Secretary of State John Kerry.

There are already air strike plans being drawn up, so I believe the U.S. will attack Syria, and it could happen this Thursday, CNBC reports.

In light of the U.S. planning a strike on Syria, more traders are turning over to safer investments like government bonds.

In my last article about the Egyptian clampdown on protesters and killing of civilians, I mentioned that holding off on shorting your stocks would be ideal to fully assess the situation, but with recent events in Syria, I would short them. Here’s why.

On a WTI level, the impact of the American hurricane season will keep prices higher, but no matter how far away WTI is from Brent and the Middle East, the situation abroad will have an impact on American prices no matter what.

And regarding Brent crude, there are several factors beyond the Syrian conflict that are causing oil spikes, such as protests in western Libya that have stopped production. Overall, production in North Africa had slipped to 200,000 bpd, only an eighth of full capacity, according to The Washington Post.

If you combine that with the Syrian conflict, the uncertain fate of Egypt, and protests in Turkey, there are too many unknown factors in the region that will keep oil prices at above-average levels.

Now, we don’t know what will come out of these events in the Middle East, but we do know that rampant speculation will continue to drive up prices as long as traders believe things could take a turn for the worse.

Don’t Give Up on U.S. Oil

Shorting your energy assets may be a good short-term strategy, but not for good.

Brent crude has been more heavily affected than WTI crude, but from a U.S. perspective, it should strengthen American resolve to break away from Saudi oil to mitigate price damage stemming from constant turmoil in the Middle East.

The U.S. is on a solid projection to break free of OPEC imports by 2030, according to the International Energy Agency, and even become an oil-exporting nation.

U.S. shale oil stocks are hot, and there is still excitement among smaller energy companies drilling for shale resources.

Natural gas prices are low, but prices are creeping up, and there is a great deal of excitement for liquefied natural gas exports. And with oil prices higher, more attention could be steered toward natural gas.

It is natural for people to want to feel security during times of trouble, and this is especially true of investors who decided to switch to Treasuries as a safe haven.

But there is still plenty of growth within the domestic oil industry, and oil stocks are still worth it in the long-haul.


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