Smoke is rising from violent hot spots across the Middle East and North Africa — most notably in Syria, Egypt and Libya. But while there’s no smoke without fire, have these political conflagrations already set global oil markets ablaze?
Bank of America Merrill Lynch argues that they have.
In a report last week entitled, “Syria sets oil on fire,” the US investment bank predicts that the most likely reaction by crude markets to Western military strikes within Syrian territory would be a short-lived spike in North Sea Brent crude prices to $120-130/b., assuming a NATO-led contained military strike that lasts only a few days. Moreover, a prolonged conflict, although deemed less likely, could send the price of Brent crude initially soaring to $160 before falling back to a range of $125 to 140/ barrels and sticking there for about a month.
“In a worst case scenario where Syria turns into a protracted Vietnam-style boots-on-the-ground proxy war, involving allies such as Russia or Iran, we believe oil could see a $50/barrel price swing.” BofA adds.
Syria does not itself produce much crude, at most 50,000 b/d during the current brutal civil conflict, down from only about 350,000 b/d pre-war. Nonetheless, the ravaged Arab state is located at the heart of what is still the world’s most important oil-producing region, stretching from the North African OPEC producers Algeria and Libya in the west to OPEC founding members Iraq and Iran in the east, with OPEC kingpin Saudi Arabia dominating the middle ground.
Of those OPEC neighbors, Libya is caught up in a resurgence of sectarian violence in the wake of its 2011 revolution. That has caused the North African country’s total oil output to plunge by nearly 1.4 million b/d to a post-war low of 240,000 b/d, National Oil Corporation chairman Nouri Berrouien told Platts Thursday.
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Some traders suggest Libyan output could be even lower, at a level barely covering domestic requirements for petroleum fuels. In any case, operations at the country’s ports and oil export terminals have been paralyzed by industrial strikes spurred by tribal disaffection with Libya’s post-revolution central government. To all intents and purposes, the country’s crude exports have for now dried up.
Superficially, Libya’s woes seem unconnected to the even bloodier conflict in Syria. Yet they reflect the regional web of ideology-based political strife crossed with sectarian religious schisms and ethnic/tribal rivalries. Ever since the start of Arab Spring uprisings in early 2011, tribal-based rivalries in particular continue to afflict a widening swath of MENA region economies.
Muslim Brotherhood backing for disaffected Libyan tribal elements figures into the dogmatic Islamist versus liberal/moderate divide that has engulfed Egypt in recent months, following the July 3 military ouster of the country’s first elected president and prominent Brotherhood figure, Mohamed Morsi. In turn, popular sympathy within a number of the region’s wealthier Arab states for the goals of militant Muslim groups, often linked to the Muslim Brotherhood and/or Al-Qaeda, has sent Arab boots-on-the-ground streaming into Syria from neighboring states, there to spark in-fighting in the ranks of the fragile Syrian anti-government rebel coalition.
In Syria, such foreign, although not state-sponsored, interference has further inflamed the region’s historic complex of ethnic, sectarian and political tensions, resulting in the export of the country’s civil conflict to the equally divided neighbor states of Lebanon and Iraq.
The rulers of most of the Arab oil producing states bordering the Persian Gulf have rightly viewed the upsurge in jihadi influence on the course of the Syrian conflict with alarm, regarding it as a direct threat to the stability of their own autocratic grip on power. In reaction, key Arabian Peninsula oil producers including Saudi Arabia and the UAE have stepped up financial and military backing for more moderate elements within the Syrian rebel coalition and also for Egypt’s interim military government.
Rather than helping to contain the violence, however, such strategies could backfire and increase the likelihood of violence spreading in the rest of the region. This is due to the injection into the already toxic mix of local influences of the well-established rivalry between Riyadh and Tehran for regional hegemony, along with resurgent Cold War-style rivalry between Moscow and Western powers. Both are currently finding proxy expression in the Syrian arena.
Tellingly, Arab fears of Iranian interference with shipping through the Strait of Hormuz are re-emerging, exemplified by a Kuwaiti government plan, reported Thursday by the official Kuwait News Agency, to offer subsidized basic food supplies to the emirate’s large expatriate workforce in the event that Tehran closes the strategic shipping lane in retaliation for US or other Western military intervention in Syria. Fears are similarly running high of disruptions to shipping through the Suez Canada as an escalation of the current political violence in Egypt.
Neither scenario may currently seem especially likely, yet growing fear of disruptions to tanker and cargo traffic, however far-fetched, could be enough to push crude prices towards the stratosphere. Such an outcome would be of obvious benefit to Tehran, which currently needs an oil price over $140/barrel to balance the state budget, and to its allies in Baghdad.
“Meanwhile, the Syrian government’s other main backer, Russia, is happy for elevated oil revenues to keep bailing out its leaky economy,” Dubai-based Manaar Energy Consulting notes in a recent newsletter to clients.
But here’s the rub: the economies of Asia-Pacific states such as China, which currently purchase most of the crude pumped for export by Persian Gulf producers, can’t tolerate sky-high crude prices for an extended period. India, the second most populous Asian state and a major fuel importer, is already caught in a currency crisis that has dangerously eroded its ability to pay for petroleum imports that must be purchased in dollars with severely devalued rupees.
“Emerging markets are the weakest link at the moment,” says BofA. “Also, emerging market foreign exchange 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.”
That might imply imminent erosion of the current Middle East war premium on oil prices, as emerging market economic weakness comes to the fore as a market driver. It could also mean an unwelcome return to the extreme oil price volatility seen only a few years ago.