Thursday, August 29, 2013

Do Wars Cause Higher Oil Prices? Not Generally

[Wars are fought over oil.  But do wars mean higher oil prices?]

Military intervention by the US in Syria is looking increasingly likely. Here is a quick cheat sheet.

Many are calling for a rally in oil prices from its current $107 per barrel to $150 or $200 on the initiation of action.  Others are calling for a price spike higher which will quickly reverse.

Syria is a relatively small oil producer, with trivial production globally.   It's  the potential disruption from spillover into larger regional oil producing nations, including Iraq and Iran, that concerns oil consumers.

Predicting the reaction of the oil market in such situations is not straightforward and it's always worth considering a range of scenarios. It is precisely this uncertainty that has caused an abundance of caution historically, and caused supply-side over-reaction, with lower prices after Western forces finally act.

Over the past 30 years, military interventions involving external, US or UN, forces against Arab nations or Iran have generally resulted in lower oil prices.  It is only regionally internal, Arab vs Arab or Arab vs Persian, warfares that resulted in higher prices (charts below, click to enlarge). 

Perhaps this is because by the time Western military operations begin the market has already priced in the event due to a more free press. Traders monitor Western political sentiment, military jet fuel purchase requisitions, and fleet movements, ahead of time.  Or maybe it is the actual, or threatened, impact of an IEA global release of strategic petroleum reserves, along with the willingness of US ally Saudi Arabia to increase production from its spare capacity during disruptions.

Follow @CommodityMD