Oil prices have already spiked to a six month high amid anticipation of U.S. military action against Syria. Brent oil topped $117 per barrel on Wednesday. Yesterday, we reported that the U.S. armed forces are ready to launch a military strike on Syria. The United States and its allies plan to punish Syria for using chemical weapons in an attack on Damascus last week which killed more than 1,300 civilians.
Preparation for Syria attack
Societe Generale analyst Michael Wittner said in a research note that the U.S. and its allies are likely to attack Syria next week. The threats and rhetoric from the U.S., France and the U.K. have gotten more severe with each passing day. So, the option not to attack doesn't even exist, says Wittner. If the United States doesn't attack, it will be seen as a weak country that couldn't do what it said. The United States won't let that happen because such a move will have critical ramifications.
U.S. and British officials have said that their aim is not to dethrone Assad, but to protect civilians from deadly attacks. Societe Generale says that a few months ago, the Pentagon prepared a range of options which include a surgical cruise missile attack at military targets—excluding chemical weapons complex because an attack on such targets would harm civilians. The U.S. has also planned an air strike to eliminate the Syrian Air Force.
How an attack on Syria will affect oil prices
Societe Generale believes that prices have nothing to do with Syrian oil production or exports because Syria itself is not a major oil producer. Since Syrian unrest began in 2011, the country's oil production has declined from 350 kb/d to less than 50 kb/d. The real problem is that Syrian conflict could spill over into the broader Middle-East, causing a larger supply disruption.
Wittner says that the Sunni vs. Shiite conflict in Syria and Iraq are at the same level. Growing violence in Iraq has hampered oil supply in the recent past. Over the past 2-3 months, the northern pipeline that carries Kirkuk grade to Ceyhan has been attacked several times. The attacks have reduced oil exports by more than 40%. The oil-directed strikes could affect the 2Mb/d production of Basrah grade oil that is exported via Basrah's port complex. Furthermore, Syria's ally Iran may also disrupt oil supply to hurt economies by causing an increase in oil prices.
Will Saudi Arabia come to rescue?
Societe Generale believes that Brent crude could jump to $120-$125 a barrel in anticipation of an attack. This price range assumes that there will not be any supply disruptions due to the attack on Syria. However, if supply is disrupted in Iraq or other Middle-Eastern countries, Brent oil could surge to as high as $150 per barrel.
However, the $150 price wouldn't sustain for long, because Saudi Arabia has spare capacity at 1.7Mb/d, which could be increased to 2Mb/d. Other mechanisms might also come into effect to cool off prices. The disruption in oil supply will affect GDP growth, consequently lowering oil demand. If the situation gets severe, the IEA countries could also decide to ramp up their oil production and protect fragile economic recovery in Western countries.