As crisis in the Middle East deepens on concerns of a US-led military move against Syria, oil price is being driven up by geopolitical maneouvring.
Clearly, a “Syrian premium” is built into the oil price these days although it is difficult to gauge it.
Besides the supply-demand dynamics, oil prices are generally set by global crisis, especially in advanced and emerging countries and crude producing and exporting nations.
A prolonged Syrian conflict could mean an oil spike to $160 a barrel although the possibilities are limited, Bank of America Merrill Lynch (BOAML) recently cautioned in a report.
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.
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, often 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.
While oil demand in the US and Europe is starting to recover after a harsh downturn, oil demand seems to look weaker in Brazil, Indonesia, Turkey or South Africa on tighter liquidity and capital outflows.
At the same time, India, a major emerging country and a member of the Brics grouping, 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.
Meanwhile, the threat of a US-led military strike against Syria in retaliation for the Assad government’s chemical weapons attack continued to cast a cloud over the markets.
Although Syria is not a major oil producer, investors fear that an attack could roil the Middle East and reduce crude supplies.
Oil prices rose at the weekend amid escalating concerns that the possible Western military strike on Syria will disrupt Middle East oil exports. The highly volatile situation triggered market concerns over oil supplies in the Middle East, where one third of the world’s crude is pumped. The result - oil prices are being driven up higher.
The threat of a Syrian war is already priced in crude markets. But until the Syrian situation becomes clearer and real impact known, uncertainty will prevail. That may keep oil price higher.