US military action has pushed oil prices higher, even though the loss of Syrian crude production can be replaced by other actors. If the war spills over into Iraq it could push oil prices high enough to endanger global economic recovery.
US might take action against Syria
Without getting into the ethical or military considerations, it seems pretty likely that the U.S. (or a U.S.-led coalition of the inexplicably willing) is going to take military action against Syria in the next week or so. Speculation points to a bombing campaign, but no one knows for sure. The tension around this decision, not to mention the Syrian civil war itself, has been driving oil prices and they are likely to go up further. How much further depends on the outcome of the intervention.
“[SG oil analyst Michael Wittner’s] base case scenario is the United States Brent Oil Fund, LP (NYSEARCA:BNO) rises to $125 (currently $115),” says Societe Generale equity strategist Paul Jackson. “The problem is not the potential loss of Syrian production (only 50 kbd), rather it is that heightened Sunni-Shiite conflict causes a reduction in the supply of oil from Iraq.”
Outcomes for Brent
Jackson divides the possible outcomes into three scenarios: Brent hits $125, Brent hits $150, and what he calls the ‘unintended consequences scenario’. If Brent hits $125 and stays there, then there is no fundamental market shift. Oil and gas sectors will likely overperform, while transportation and consumer goods will underperform; however, the total impact is relatively small.
Investors would have to rethink their positions if it looks like the United States Brent Oil Fund, LP (NYSEARCA:BNO) is going to hit $150 “with the global economy under threat and equity indices likely suffering sizeable losses. Cash should be preferred,” says Jackson. Oil and gas producers, along with electric utilities, would become strong favorites, while transportation, consumer stocks, and telecoms should be avoided.
Russia and China relation at risk
But it’s the third category, the ‘unintended consequences’ scenario, that has Jackson really worried. “Lurking in the background is the risk that any action by the allies brings them into some form of conflict with Russia and China. The probability appears small but is certainly not zero.”
With ongoing instability in Iraq, car bombings in Lebanon, and tension between the US and Syria’s allies (including Iran, Russia, and China) the possibility of a larger regional conflict can’t be ruled out – just the kind of low-probability, high-risk event that investors are too often guilty of ignoring.
