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Syria’s Impact On Oil Prices

By Robert Rapier on April 11, 2017

Last week I attended Investing Daily’s annual Wealth Summit in Alexandria, Virginia. It’s the one time each year all of the Investing Daily analysts are in the same location, so it gives us a chance to catch up, compare ideas, and have one-on-one time with subscribers. I thought this week I would address some of the more common questions that I was asked during the week, and share some snippets from my presentation.

We were at dinner last Thursday night when word started to circulate through the restaurant that President Trump had ordered a missile launch at Syria in retaliation for the gas attack that had been in the news over the previous week. Let me acknowledge that this is first and foremost a human tragedy, and that is the most important element of the story. We have all been moved by many images from the Syrian conflict, and it saddens me to see it continue to drag on.

But inevitably, people started to ask me how the missile attack impacts oil prices. Here is how I answer that question. First, Syria is a minor oil producer. According to the BP Statistical Review of World Energy, Syria averaged 30,000 barrels per day (BPD) of oil production over the past two years. That’s less oil than Romania produces. Half of Ohio’s oil production.

Now, Syria did produce nearly 700,000 BPD in 2002 (comparable to current Bakken production), but that had declined to less than 400,000 BPD by 2010. Then the civil war there resulted in a precipitous decline in Syria’s oil production after 2011. That decline was priced into the market long ago. 

So from a crude oil supply standpoint, Syria’s contribution is insignificant. Still, the markets were bound to move. I answered the question that night that there would probably be a small spike because the market doesn’t like uncertainty, but that it would settle down pretty quickly. That was exactly what happened.

The oil markets get a little nervous about military actions involving the U.S. and Russia (two of the world’s top three oil producers) on opposite sides of a conflict. It also gets nervous about military action anywhere in the vicinity of the Middle East. The nightmare scenario for oil supply is that the conflict spreads to nearby countries that are major oil producers, and that could have a bigger impact on oil supplies. For instance, if any conflict ever spreads to Saudi Arabia, and curtails even 10% of its production, there were be a sharp and swift spike in oil prices.

One thing I did note to people who posed the question, is that Black Swans in the oil market are almost always swift and to the upside. Think OPEC oil embargo of 1973. Or the first Gulf War. There are many scenarios where the price of oil could double swiftly. So if you are the kind of person who makes those small, Black Swan bets on the direction of oil, bullish is the way to go.

Black Swans that send prices in the other direction – such as the shale oil boom – take much longer to play out. Yes, the price of oil was ultimately cut by two-thirds, but that took more than six months from the initial drop, AND the signs of the inventory build that led to the drop were evident more than a year ahead of the initial price decline. I will address this issue in the next article.

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