The phone’s ringing off the hook in the last week of a languid summer. It’s CNBC, Fox and even Al Jazeera, all looking for insight from me into how the Syria mess is going to impact oil prices.
What, I’m going to go on TV and give them something better than I’m going to give my faithful? Not a chance. Here’s the absolute skinny on what’s going on in Syria, what I think is going to go on in Syria and how – EXACTLY – to trade it.
First and foremost is that the oil market is not traded in a vacuum where only the fundamental inputs of oil supply are going to be the only things you want to measure. Part of the reason I have continued to tell you for weeks prior to the Syrian dust-up that ALL the risks to oil remained on the upside is because of the action in the rest of the capital markets. The stock market looks like every rally needs to be sold, the bond market is in panic mode with taper talk and Gold hasn’t had its normal stellar year, even though right now it looks like a buy. If you’re a manager looking for a diversifying hard asset, you’ve got little choice but to have been looking at oil and the Syrian/US conflict potential is only a little gas into an already roaring fire.
No matter what happens in Syria, as long as those conditions in the other capital market remain as I’ve laid them out, you still risk more on the upside in oil prices than on the downside, even with Brent threatening $120 a barrel.
But on Syria, we have certain fundamentals and a well-known outline in Libya that we can draw on. Like Libya, Syria is a mostly insignificant supply source into the world crude market, producing slightly over 300,000 barrels a day or less than 0.4% of the global supply. Syrian oil fields are mostly congregated in the East and Southern areas, nearer the Iraqi border and far away from the current fighting with rebels as well as far away from the likely strike zones that the US might engage in with Syria to try and create what Senator McCain lovingly calls a ‘free zone area’. Just as in Libya, these oil production areas are very unlikely to sustain damage, even from rebel force sabotage. As in Libya, there is little real supply risk.
Most of the professed oil panic from Syria is related to what I’ll call ‘contagion risk’, the possibility that fighting might spread into more delicate oil areas, particularly Iraq and even Turkey to the North. Again, this type of similar contagion risk was a good part of the reason for the lofty rally in oil prices during the Libyan crisis and again this was neither a likely outcome, nor did it come to pass.
So, with so few fundamental forces legitimately pushing prices higher, what is floating oil to such high levels and how should one play the move?
I am convinced that just as the oil action and likely military action has so closely mirrored Libya (with about 1m barrels a day output), the traders have convinced themselves to TRADE Syria in precisely the same way as Libya, buying oil up until the first several days of US strikes and then finding a way out of the trades quickly long before the tyrant (Assad vs. Khadafy) falls.
My positions in oil right now reflect this, but I do not recommend entering the trade at this moment, even if I believe that Brent prices are well on their way above $120/barrel. Instead, one instant way to play Syria in the short term would be to circle back to mid-con refining names (CVI, HFC, WNR) and take advantage of an increasing Brent to West Texas spread. This will truly be a fast trade idea, though; as I believe that these spreads have been only temporarily bloated by Syria.
And with these trades, as with oil itself, get out fairly quickly after the first cruise missiles land.