Syrian ‘oil disruptions’ tighten physical market

By Pratap John/Chief Business Reporter

A prolonged Syrian conflict could mean an oil spike to $160 a barrel, although the possibilities are currently limited, Bank of America Merrill Lynch (BOAML) has said in a report.

“Syria has set oil on fire with oil disruptions tightening the physical market. Extensive supply disruptions, particularly in the Middle East and Africa regions have sent global oil markets reeling,” BOAML said.

Tensions have escalated quickly since the US secretary of state claimed chemical weapons were used, and the US and its Western allies have been moving rapidly to define a military strike against Syria.

The country itself does not produce, let alone export, much oil.

Prior to international sanctions imposed in late 2011, Syria produced 350,000 barrels per day (bpd) and exported less than 150,000bpd to Europe. Now, output is down to 50,000bpd.

However, the real concern with Syria is that any conflict could draw in others, the report said.

Syria has close political ties with Iran, exerts strong influence in Lebanon, and shares a large border with Jordan, Turkey, Iraq, Lebanon and Israel. The country has a high degree of ethnic and religious fractionalisation, making infighting hard to contain.

Risk of a proxy war in Syria could threaten large volumes of production from these players, and a broader Syrian conflict could rattle Middle East security and global oil markets, exacerbating oil price volatility, BOAML said.

For now, Bank of America Merrill Lynch believes that Brent prices could remain in the $115-120/b range even if Nato performs limited military strikes and the Syrian army does not respond.

On the downside, a diplomatic resolution without any military strike will lead prices to come off by around $5/barrel, down to $110/b.

“Most likely, however, is a scenario in which Nato strikes, Syria responds but no ground invasion takes place. If the conflict lasts for only a few days, oil price spikes would be short-lived to a range of $120-130/b,” BOAML said.

“Should the situation deteriorate further with Nato sending ground troops in a Syrian invasion, we acknowledge the risk that prices could rise even higher and for a prolonged period of time.

Although we do not view this as likely, such a scenario could lead oil prices to stay in a $125-140/b range for a month. In a worst case scenario where Syria turns into a protracted Vietnam-style boots-on the ground proxy war, involving allies such as Russia or Iran, we believe oil could see a $50/b price swing,” BOAML said.

While oil demand in the US and Europe is starting to recover after a harsh downturn, oil demand is looking weaker in Brazil, Indonesia, Turkey or South Africa on tighter liquidity and capital outflows. At the same time, India is battling a major crisis in confidence.

Also, emerging markets’ forex depreciation is sending oil prices in local currencies soaring, suggesting any oil demand destruction on the back of this Middle East turmoil will happen now in emerging markets, the report said.

On top of that, OECD commercial oil stocks outside the US have come down by 26mn barrels from April levels, although a coordinated release of government stocks could relieve pressure on oil prices if done promptly, BOAML said.