The U.S. cruise missiles that were fired on Syria will have severe repercussions for the global oil market. The current price hike could be short-lived, but new confrontations are already on the horizon. Analysts are wrong to expect that Trump’s military action has improved the Middle East’s situation. The political risk premium will be higher for the foreseeable future as instability has increased.
Assad’s allies, Russia, Iran and Hezbollah, are openly confronting the U.S. and its allies. In a statement made by the joint command center, which is made up of Russia, Iran and militias supporting Syrian President Bashar al-Assad, the U.S. has been warned that the missile attack crossed “red lines”. The pro-Assad group reiterated that any new aggression will be met by military force.
One of the main worries should be the cancellation by Russia of its cooperation with the U.S. (and others) with regards to operational security in the area. The risk of a military confrontation between the different armed players in the conflict has increased. Several NATO countries, such as Belgium, have already postponed further air force operations in Syria. The latter is playing into the hands of the respective armed extremists and Russian backed forces. It seems that this is not what Trump was intending.
At the same time, the Arab world also doesn’t seem to be totally supporting the U.S. attack. Iraq, as a perceived ally of Iran, indicated its worries while the region’s leading military and political power, Egypt, has openly criticized the military action. This in stark contrast to most of the GCC Arab countries. Trump’s unilateral military action has increased instability instead of decreasing it. As openly criticizing Washington is still not done, except by Cairo, leaders in Riyadh, Abu Dhabi, Doha and Baghdad, will be assessing the options and the possible negative repercussions of this U.S. action. Related: Wall St. Gears Up For The World’s Biggest Oil Trade
In the short term, the global oil market might not feel an effect of the actions. Syria’s position as an oil and gas producer is negligible. Since the start of the fights against Assad no real effects on global oil markets have been shown. Syria only produced around 25,000-33,000bpd in 2014/2015. The future impact, however, could be immense. Especially if there is a spill-over of the civil war to Jordan, Saudi Arabia, or Iraq. Trump’s actions have increased this option substantially.
Not only are the pro-Assad allies more inclined to act harsher to any third-party military interference in the country, but some Shi’a militias are openly preparing for operations against other non-Syrian players. Facts have emerged the last weeks of Shi’a militias buildup around the Golan Heights, bordering Israel, and on the Jordanian border. A potential military clash with these two countries could increase the political risk of a total war in the region substantially.
Looking at current Iranian statements, new actions outside of Syria as part of Iran’s proxy-wars are to be expected. Iran’s support of the Houthi rebels in Yemen is expected to be increased. Tehran will use this as a sign to Arabs and the West not to expect Iran just to sit and wait. Increased offshore military operations of Houthis or Iranians against ships in the Bab Al Mandab (Strait of Aden), could directly threaten the transport of 3.8 million bpd of crude oil and petroleum products. The attacks on Saudi navy vessels or Western ships last year have shown that Iranian-backed groups can.
When looking at a direct military confrontation between Iranian IRGC forces and U.S. military in Syria, an option that has increased substantially due to the missile attack, Iran could also act against shipping lanes in the Persian Gulf area. Strait of Hormuz operations will threaten global oil (17 million bpd) or LNG (30 percent) supplies. Iran’s NAVY or Special Forces are well equipped to stage these attacks on a very short notice. The effects could be devastating. Risk premiums will shoot through the roof if this is even on the table.
Iran could also have another option in mind. Not willing to have a direct confrontation with U.S.-led forces in Syria, Tehran could opt for a new proxy-war on the soft-belly of the anti-Assad coalition. A potential increased Iranian engagement in Saudi Arabia or Bahrain already is considered. Not only will it refocus the attention of Arab countries on a potential Shi’a conflict in Saudi’s Eastern Province, but also could lead to a further escalation of the ongoing unrest in Bahrain. Iran is one of the main backers of the Shi’a uprising still ongoing in Bahrain, not only a major asset for Saudi Arabia but also harboring one of the main U.S. military bases in the region. An explosion of unrest and instability in that particular corner of the Persian Gulf would directly push up risk premiums of crude oil and gas. Bahrain is almost the gate to Saudi’s Eastern Province or the world’s largest oil field, Al Ghawar. For Iran, this is a low-cost option but very effective. Related: Toshiba Can’t Shake Its Westinghouse Woes
To make matters worse, the current call for the removal of Syria’s president Bashir Assad, which was vented openly by Washington and several European leaders, will push the pro-Assad side to dig in even more. Statements currently heard by politicians in Washington or military leaders in the Pentagon to target a potential break-up of Syria on sectarian/religious lines is even more destabilizing to the whole region than ever before. Syria’s break-up or division will not only be a precedence of unknow order, but also support already existing calls for independence in other Arab countries (including Iran). Iraq, Bahrain, Yemen and Iran, will not be supporting these devastating political ideas. Saudi Arabia (with a vast Shi’a minority) and Turkey, both until now supporting Western military actions, will be against it full heartedly. Turkey’s leadership cannot survive with a possible Kurdish nation next to its borders. Military intervention by Ankara will be for sure a cause of concern.
Looking at all the above, the main question to be answered is “what was Trump planning when signing off a missile attack?” Until now it seems to be a purely political move to support his own domestic position at the expense of the Syrian conflict. No real end-goal has been stated by either party involved. This has severe repercussions for the Middle East and the global energy markets. The current stalemate in Syria, which is only increased by the military actions of Washington at present, will force Iran, Hezbollah and possibly even Russia, to show their own military power. Further escalation of the Sunni-Shi’a conflict could be on the horizon, directly threatening oil and gas operations and supplies. Eyes should still be on Washington, as the Trump diplomacy is unpredictable. After Syria, it is only a very small lap to have harsher sanctions on Iran or outright military confrontations in the Persian Gulf arena. Instability will be part of future oil price scenarios, more than we have had the last 2-3 years.
One more confrontation in the region and the historical bandwidth of $5-10 per barrel risk premium could become fact once again.
By Cyril Widdershoven for Oilprice.com
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