Concern over supply disruptions in key OPEC oil producers and the risk of disruption to oil transit routes via Egypt has resulted in Brent crude prices rising by $6 per barrel since the start of July to around $110 per barrel a week ago. Since last Wednesday’s chemical attack the prospect of military intervention in Syria and the risk of further disruption in the wider Middle East has increased adding a further $4 per barrel to Brent. All in all quite a measured response.
Despite there seemingly being plenty of contradictory evidence as to the nature of the attack, who carried out and indeed if some of the pictures were fake, the reality is we simply don’t know which is true. As Stratfor explains, the truth, whatever it is, has been politicised with major governments, including the British and French claiming knowledge that al Assad carried out the attack.
As Stratfor go on to explain this is no longer simply about Syria.
The United States has stated a condition that commits it to an intervention. If it does not act when there is a clear violation of the condition, Obama increases the chance of war with other countries like North Korea and Iran. One of the tools the United States can use to shape the behavior of countries like these without going to war is stating conditions that will cause intervention, allowing the other side to avoid crossing the line. If these countries come to believe that the United States is actually bluffing, then the possibility of miscalculation soars.
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While the probability of some kind of military strike appears very likely (quite possibly by the end of the month) the impact on oil production in the region is very uncertain, the risk of disruption certainly justifying higher oil prices. Although Syria is a relatively small producer and most of its 400,000 bpd is already shutdown due to civil war the risk is that unrest widens to include Iran and Saudi Arabia.
Should a disruption occur however any impact to oil prices is likely to be limited by the US and its allies tapping their strategic crude reserves, either via the IEA or as a separate group. The IEA has coordinated a global stock release on only three occasions before. In the early stages of the Gulf War in 1991, after Hurricanes Katrina and Rita struck the US in 2005 and in response to the prolonged disruption of oil supplies from during the conflict with Libya in June 2011.
In the latter case Brent oil prices were around $120 per barrel before strategic oil supplies were released. Irrespective of whether the global economy is more able to withstand higher oil prices now than it was two years ago, the US and its allies may also see a release of oil reserves as a tool to prevent Iran and indeed Russia from profiting from higher oil prices. In short, whatever happens it is very unlikely that oil prices will rise above $120-$130 per barrel for more than a brief time period.