As concerns over the Syrian political situation escalated, oil prices crept upward over the course of this week. With the United States ready for military intervention in the Muslim nation, the country braces for war and is stocking up on basic necessities. Global commodity prices have soared, with Brent crude touching USD 117.34 on Wednesday.
Syria spurs concern in the Middle East
“For the first time in two years, options traders are paying more to prepare for a gain in oil prices than a decline as the threat of military action against Syria spurs concern that Middle East exports will be disrupted. Options to bet on a 10 percent advance in West Texas Intermediate for October delivery became more expensive than for a drop of the same magnitude,” reported Bloomberg.
Syria has been the target of civilian protests since March 2011 and has encountered serious drops in its oil production since then. The production of crude oil from Syria in May 2011 was recorded at 345,000 barrels per day (bblpd), but this rapidly declined over the following months. By May 2012, a year later, oil production was down to nearly half its capacity.
The situation worsened further in July 2012 when production dropped another 60,000 bblpd in just one month. The protests continued and production dropped to 71,000 bblpd in April 2013 (down 62 percent YoY), the last month for which records are available. As this trend in production continued, Syrian light crude oil spot price jumped and touched nearly USD 117 per barrel yesterday.
Figure 1: Monthly oil production in Syria (000 barrels) versus Syrian light crude price
Baker Hughes Syrian Oil Rotary Rig Count
According to Baker Hughes Syrian Oil Rotary Rig Count, the number of oil rigs in Syria was 27 at the end of December 2012. This dropped to 20 by 31 January 2013 as a result of political instability. In the following months, Baker Hughes has reported zero rigs operational in Syria.
Figure 2: Syrian Oil Rig Count
Exploration activity has come to a halt
Exploration activity has come to a standstill in the country. However, the Energy Information Administration (EIA) testifies: “Syria’s oil fields remain largely unaffected – in terms of damage from fighting and sabotage – but limited opportunities to export crude and other liquids, and limited domestic refining capacity, have resulted in shut-in production.”
Keith Wade in Profit Advisor compares the current situation to the Gulf War of 1990 and says that this time should be different. “In the run up to the first Gulf war in 1990-91 US growth stalled as oil prices spiked and uncertainty caused companies and households to delay investment plans… The first and second Gulf wars were on a much larger scale than the Syrian conflict with the clear intention of sending in troops.”
It is believed by many analysts that the impact of the Syrian issue will be limited as Syria’s role in global energy is small. Syria makes up 0.15 percent of the world oil reserves and 0.31 percent of Middle Eastern oil reserves. During the pre-crisis period, Syria contributed 0.46 percent to global production of oil and 0.25 percent to global production of natural gas. “Should Brent crude rise another USD 10 per barrel to USD 125 there would be more of a problem for global activity, but Syria is not critical enough to global energy supply to necessarily warrant this,” says Wade.
It is also widely felt that the probability of a military action against Syria and retaliation from Syria, Iran or Russia is low. It is felt that the impact on the oil market is temporary and prices will recede once the panic diminishes.