Another front in Syria conflict: Oil uncertainty

The possible agreement involving Syria’s chemical weapons could relieve prospects of an imminent U.S. attack there, but the latest brinkmanship sharpens a reality that is forcing reassessment of Middle East investment by oil and gas interests: Potential supply disruptions in the region are no longer short-term blips but rather a new normal.

Syria is not a major oil producer — about 370,000 barrels of oil equivalent a day before sanctions were imposed as civil war broke out in 2011 — but several of its neighbors are, and military escalation in Syria could affect deliveries through key corridors.

Anxiety and market reaction are typical following skirmishes that pop up from time to time in the volatile region. But the frequency and duration of incidents since 2011 and the Arab Spring — a revolutionary wave of protests, riots and violence there — leaves companies and industry analysts more uncertain about the prospects than previously.

Oil prices have climbed since the Aug. 21 chemical attack triggered the current crisis — although the price had eased in recent days.

On Wednesday, international benchmark Brent crude closed up 25 cents at $111.50 a barrel on the ICE Futures exchange in London, compared with $109.90 on Aug. 22.

Shifting markets: OPEC sees well-supplied oil market, lower demand for its crude

U.S. benchmark West Texas Intermediate crude rose 17 cents to close at $107.56 on the New York Mercantile Exchange, compared with $105.03 the day after the chemical attack.

U.S. officials blame the regime of Syrian President Bashar Assad for the attack that killed almost 1,500 Syrians, and President Barack Obama continued to make the case in a speech Tuesday night that the U.S. must respond.

The possibility that Syria will turn over its chemical weapons — a deal still being negotiated at top government levels in Washington, Moscow and Damascus — might reduce the global tension, but the civil war in Syria rages on, and with it the possibility of continuing volatility in markets.

“A sustained uncertainty is not good,” said Hassan Eltorie, a Houston-based oil industry analyst at research firm IHS.

More than 1 million barrels of oil per day were lost to supply disruptions in the Middle East and elsewhere in 2011 and again in 2012, and so far this year disruptions are on pace to rival those numbers, which are high by historical standards.

The fallout can mean higher pump prices for motorists and higher costs for fuel-reliant manufacturers that lose production time. On the flip side, higher oil prices can fatten profits for companies that produce oil in countries unaffected by turmoil.

The likelihood of continuing volatility makes the horizon cloudier for company executives, who try to project energy supply and demand over several decades.

They always factor periodic geopolitical concerns into those projections. But if the supply disruptions in the Middle East become more routine, how does that change the outlook?

“That’s something a lot of us are grappling with,” said BP economist Mark Finley. “How do you predict something that’s unpredictable?”

US: Iran can’t access much oil income

BP and other oil companies must decide whether projects are viable — from a cost and revenue standpoint, as always, but also operationally based on the environment where the work is being done. BP has interests in Iraq.

Finley said the region presents risks and opportunities. Which geopolitical reality will control in the future is the question.

“I think it’s too early to tell,” Finley said.

Analysts at Tudor, Pickering, Holt & Co. said in a recent research note that unrest typically creates more smoke than fire in the oil markets, with supply disruption fears seldom materializing into real physical constraints. But things have changed.

“The most recent data points are the 2011 Egypt-Libya Arab Spring disruptions and the rapidly escalating events and harsh rhetoric from key countries suggests the probability of a disruption is increasing,” the analysts wrote.

The firm is most concerned about a regional escalation drawing in more important producing countries, like Iran, Saudi Arabia or Iraq. It also is watching to see if there will be an effect on seaborne oil transportation along the Suez Canal or in the Persian Gulf.

As for the effect on companies that do business in the Middle East, major U.S.-based oil and gas companies aren’t operating in Syria because of the sanctions. France’s Total and Royal Dutch Shell also withdrew.
“Whoever is there are probably smaller companies and not likely based out of the U.S.,” said Eltorie, the IHS analyst.

The real impact, Eltorie said, is in the commodity markets, and that means more pain at the pump.

“We’re all going to be paying more because of this,” he said.


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