Oil Forecast: The "Syrian Premium" Is Not Temporary

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By an apparent agreement to place its chemical weapons under international control, Syria seems to have dodged an imminent American military attack.

Yet even as the world takes a step back from the brink, three critical questions still remain:

  1. Will Syrian President Bashar Assad hand over all of his chemical weapons?
  2. Will the proposed international control mechanisms satisfy Washington?
  3. Will the final result contained in the U.N. report on the chemical weapons use outside of Damascus alter the outcome?

Of course, until the latest news hit, one result had seemed certain: The global oil market was bracing for higher prices. West Texas Intermediate (WTI) closed at a 28-month high on Friday, while Brent crossed the $116 a barrel level.

Following the agreement, that trend has reversed, sending oil prices in both New York and London lower.

But has this crisis really been defused?

Just look at oil prices, and where they're undoubtedly headed…

Calculating the "Syrian Premium"

The developing tensions have added a "Syrian Premium" to the price of oil. By my best estimate, this "crisis premium" was $4 a barrel in New York and $8 in London.

In other words, absent this premium, WTI should trade at about $103 a barrel, while Brent should trade near $107.

As of Tuesday, that premium stands at $4 in London and $3 in New York, down 50% and 30% respectively off of Friday's close.

Given Syria's place in the energy markets, that is the most direct way the crisis has impacted the energy sector.

But it is hardly the only effect.

The truth is the market has no genuine way to determine the degree of volatility resulting from what is an unknown level of instability.

Needless to say, that is usually a formula for an increase in price beyond what the market fundamentals would sustain.

How long the spike remains depends on the level of uncertainty. At the moment there are more questions than answers.

And despite this morning's news, that uncertainty is not likely to be receding anytime soon.

That is because, absent a "palace coup" to unseat Assad in Damascus, nothing was likely to happen this week to reduce the tension. Congress is back in session, but the Obama Administration is still faced with a very close vote on obtaining a Congressional approval for any strike. The specter of Iraq still weighs heavily on both sides of the aisle.

It is the same case in London, where Parliament has made it clear it will not agree to support a missile strike until the U.N. team reports findings that chemical weapons were used. That may well not take place until the end of the month, although there are likely to be leaks of the main points beforehand.

France and Saudi Arabia may have already declared support for military action, but there has been no approval for any other EU or Gulf Coordination Council member state.

Meanwhile, Moscow is pledging ongoing support for Assad (while also leaving the door open to apply U.N. Security Council-sponsored pressure against the Syrians should the U.N. report justify such a move).

In short, before the news, this week had been shaping up as one of accelerating rhetoric from the White House, considerable lobbying on both sides of the issue, and a continuing impasse.

What's Our "Goodbye Code?"

Of course, President Obama could authorize a strike without the permission of Congress. But the domestic political environment in the U.S. would not support that decision.

There are clear misgivings emerging these days over the proper American position in what is a civil conflict in Syria and little support for another open-ended military excursion into the region.

That seems to be the gravamen in all of this political maneuvering and rancor. It also reminds me of a basic rule in my earlier career.

You see, in the intelligence business, you always wanted to have what we called a "goodbye code."

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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