Syria sends oil to 2-year high, $150 spike feared

Oil has jumped to a two-year high and could see Brent spike as high as $150 per barrel as US and western allies move towards a military strike on Syria.

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Brent October futures are above $115 per barrel and West Texas Intermediate blend (WTI) hit $110 on speculation unrest in Syria will disrupt oil shipments and supplies in the Middle East. For WTI its the highest price since May 2011.

The US and Britain are gearing up in a coordinated military action against Syria, as both confirmed chemical weapons attacks were carried out against civilians, something the Assad government denies.

The US-Syria standoff could send oil prices soaring, and Brent could ‘spike briefly’ to $150 a barrel if the US initiates a military attack on Syria, Societe Generale bank told Bloomberg on Wednesday.  

US Defense Secretary Chuck Hagel has given the green light to launch a strike against Syria, and is just waiting for the directive from President Obama.

“The concern is that an attack on Syria will reverberate through the region, increasing the spill over into other countries and possibly resulting in a larger supply disruption elsewhere,” Michael Wittner, the head of oil market research in New York, said in an August 27 report.

Oil-production in Syria is low, but its geographical position poses a threat to disrupt neighboring pipelines and seaways. Turkey, its northern neighbor, is home to 2 major pipelines that transport Iraqi oil to Europe and Central Asia. 

A conflict in Syria would benefit more ‘detached’ oil producing countries, like Saudi Arabia, which would be able to capitalize on supply chokes in Iraq and Iran. Saudi Arabia has the capacity to  produce 9.8 million barrels of crude per day.

Simultaneous turbulent politics to the south in Egypt could also threaten global supply, as Egypt hangs in an unresolved state of emergency, fanning fears Suez Canal operations could be disrupted. A crucial trade route, the canal handles 800,000 barrels of crude a day and the Suez-Mediterranean Pipeline, which also runs through Syria, is a regional transport staple.

A US-led strike would hook oil-rich Iran, a Syrian ally and OPEC member, into the conflict. Another big geo-political concern for oil investors is spill over into Iraq, a direct neighbor of Syria that produced 3 million barrels of crude per day in 2012. Many Syrian refugees have sought safety in Western Iraq.

Hawkish military hints of intervention in Syria have sent prices up despite a 2.47 million barrel increase in oil supplies last week, as estimated by the American Petroleum Institute.

Syria’s foreign minister has warned against military strikes and said his country’s defenses will ‘surprise’ the world.

A US-led missile strike seems likely in the next week, according to most political commentators.

Russia’s stake in expensive oil

Russia, an oil and natural gas dependent economy, and friend of numerous Middle Eastern oil producing states, has said it doesn’t plan to go to war with anyone over Syria, and the US may be jumping to conclusions.

Russia’s economy counts on oil prices above $100 in order to adequately fund the budget, of which oil and gas revenue provide 50 percent of funds.

The country's reliance on oil prices in world markets makes it vulnerable to a surge in pricing, as the 2008 bust/boom dramatic rise and fall demonstrated. Russian officials, as well as investors, should fear any dramatic increases set off by Syria.

Crude oil prices in the summer of 2008 hit a record high of $147 per barrel, and then by December 2008, the bubble had burst and Brent was trading near $40 a barrel.

Chinese consumption and increased worldwide GDP, coupled with Syrian unrest, could create a demand bottleneck, and another bust/boom effect.