Over the last month, oil prices have been steadily climbing due to an assortment of factors. The oil crisis in Libya, production problems in Nigeria, and low OPEC spare capacity have all served to tighten the oil market. Exacerbating this is the looming threat of Syria, where the prevailing opinion is that any American intervention will send the price of crude oil skyward. Estimates as to how high said price spike will be and how long it will last vary considerably, but most agree that military action will be generally inflationary.
However, some claim that the opposite will happen. Carley Garner, co-founder of DeCarley Trading and author of A Trader’s First Book on Commodities, claims that the oil market might tumble following an American strike in Syria. A Morgan Stanley note this week echoed the sentiment, stating that “the higher the run-up prior to the event, the greater the post-event decline … we would be sellers on any upward price action on military intervention in Syria.”
Oil prices have historically rallied in anticipation of major global security events; fear of worst-case scenarios pushes speculators to bid up the price of oil, but that price falls after decisive action is taken. For example, in the lead-up to the 2003 Iraq war, the price of oil rose steadily before the beginning of the campaign. In the month that followed, the price of WTI dropped over 30%, from $37 a barrel in mid-March to $25 a barrel by the end of April.
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Similarly, in the lead-up to the 2011 intervention in Libya, oil prices rose until the NATO mission moved from no-fly zone enforcement to targeted strikes on Gaddafi’s command and control compounds in Tripoli. During that episode, WTI climbed to over $110 a barrel in April and dropped to under $80 a barrel in August.
Add to this that the stochastic oscillator—a tool that indicates whether a certain product is overbought or oversold—shows that crude oil has been firmly in the overbought territory since July and it is clear that the market is ready to sell.
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Those shorting the oil market could see handsome profits if historical trends hold, but are gambling that the second-order geopolitical effects will remain mild. The ethnic component of the Syrian civil war could push rebels to attack pipelines in western Iraq or even provoke a response from Iran, both of which would push the price of oil even higher.
It is certain to be an interesting month for oil traders, but only time will tell whether buyers or sellers are going to come away the winners.
By. Rory Johnston