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MENAFN - Khaleej Times - 03/09/2013
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(MENAFN - Khaleej Times) Syrian scenarios now obsess world financial markets.

The October contracts for Brent and West Texas oil futures eased to 115 and 108 after the British parliament rejected David Cameron's vote to participate in Barack Obama's coalition for a strike in Syria.

Westminster obviously has too many bitter memories of Tony Blair's "poodle diplomacy" in the countdown to the Iraq War in 2003. The Arab League has also declined to support a US strike on Syria, unlike the case in Libya. The Pentagon and White House sources suggest the US is prepared to launch a surgical strike on Syria military targets to punish the Assad regime after it violated Obama's red line on chemical weapons. In the Mediterranean, US naval warships position for cruise missile strikes off the Syrian coast. The world's stock markets have mostly fallen in August and some Asian currencies (Indian rupee, rupiah, peso, baht and ringgit) are in a free-fall against the dollar. I reiterate my call for Brent to rise to 120 by October.

The prospect of US military intervention in Syria comes at a crucial moment in Middle East oil politics. Two months after the Egyptian military high command overthrew the Muslim Brotherhood government of Mohammed Mursi, violence still rages in the Sinai, a threat to the four million barrels of oil and refined products transported across the Suez Canal, the region's second most significant energy choke point after the Straits of Hormuz. Iraq's oil exports and production have also fallen as violence has escalated against the provinces of Anbar and Diyala even as the government of Nouri Al Maliki is embroiled in a dispute over oil and gas drilling with the Kurdish Regional Government in Erbil.

Sectarian violence in Iraq is now at its worst levels since the departure of American combat troops. The Kirkuk-Ceyhan northern pipeline alone has been attacked multiple times in August alone and exports have almost valued below 200,000 barrels a day. Iraq could even be unable to supply Chinese, South Korean and Taiwanese refineries who were forced to switch to Basra Light, Iraq crude after the US and EU embargoed imports of Iranian oil. Libya's militias have also disrupted its oil terminals and ports on the Mediterranean and caused production to drop to post-Gaddafi lows of 800,000 barrels, far below 2010 production levels of 1.6MBD. The inflow of Syrian refugees has led to economic and political stress in Turkey, Lebanon, Jordan andraqi Kurdistan. Syria's role as a minor LNG producer in Deir Zor is dwarfed by diplomatic backing by Russia and Iran.


The worst-case Brent scenario is an unanticipated escalation of the Syrian crisis to a wider Middle East war. The Assad regime could retaliate by firing its Russian-built missiles at the US Sixth Fleet in the Mediterranean or, as Saddam Hussein did during the 1991 Gulf War, against other targets. Energy infrastructure is an obvious target to disrupt the global economy, as the "tanker war" in the Gulf of the late 1980s or the sabotage of 600 Kuwaiti oil wells in 1991 demonstrate. If a strike on Syria leads to Iran and Hezbollah's direct military involvement, oil prices will panic since the Opec's spare capacity is down to one MBD even as economies of China, Europe, US and Japan rebound.

If Turkey bombs Syria, Assad's missiles could retaliate against the Turkish oil port of Ceyhan, the terminus of Iraqi Kurdistan natural gas pipeline. Ceyhan is three hours from the Syrian border and while no Rotterdam, Singapore or Houston, the Turkish oil port is the hub of one per cent of the world's oil production. In a worst-case scenario, Brent could well rise to 150 and trigger a global economic recession, as oil shocks did in 1973, 1979, 1990 and 2008.

The best-case scenario for oil markets would be a US missile or stealth bomber strike on Syrian military targets that does not lead to retaliation by the Assad regime. Obama's credibility (red line on chemical attacks) in international relations requires a military strike that does not lead to involvement in the civil war. The Kremlin could decide that Gazprom exports to the EU are more crucial to Putin's own regime survival than backing Assad to the bitter end.

The Kremlin backed losers like Gaddafi and Saddam in past oil wars. This could cause Brent to fall to 105 but no lower since the geopolitical risk premium in oil prices is not limited to the Syria crisis alone.

Brent could fall below 100 if Iran's Supreme Leader decides that sanctions hyperinflation and oil sales embargoes could be lifted with a diplomatic rapprochement with the White House. It is not coincidental that Russia is the largest supplier of Urals trade, gas and coal to Europe and therefore gains from Middle East tensions. This is not the case in Iran, whose oil production has fallen from four MBD before sanctions to 2.5MBD now, below the output of Texas. An oil crisis benefits Moscow but not Tehran.

 


Khaleej Times




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