Syria, a Country Without Oil, Pushes Oil Prices Up

August 27, 2013 by Douglas A. McIntyre

Syria’s oil reserves rank 35th in the world. However, the anxiety index among oil traders ignores that, almost certainly because of worry that the conflict in Syria will spill over to its oil-rich neighbors. However, Syria is not very close to most oil-rich nations geographically, other than Iraq. And Iraq has oil export problems of its own, which makes it an unlikely choice as a major source of supply. Years of war and infrastructure failures have kept Iraq’s capacity at low levels compared to its reserves.

Put another way, the Syrian situation is unlikely to interrupt supply from the largest oil-producing nations. All have governments that are stable and will not be shaken by the Syrian civil war.

The largest exports of oil from the Middle East region have had virtually no unrest among their populations. This includes particularly Saudi Arabia, Qatar, United Arab Emirates and Kuwait.

The supplies from the world’s other largest oil producers continue to be steady. There is no reason to think production in the United States, Mexico, Venezuela, Canada or Brazil will change at all.

October NYMEX crude has reached more than $106 and has made a quick assault on $107. The level is extraordinary, given that less than three months ago the price was just above $90. The war premium, which appears to be the single greatest cause, has pressed the price 17% higher over the period.

Oil prices really ought to be dropping. The economies of Europe remain weak, with the exception of Germany. The Chinese economy has cooled. Oil research firm Platts recently reported:

Despite a new oil product pricing mechanism introduced by the central government in March, China’s state refiners continued to suffer in the downstream in the second quarter because of poor domestic demand, their interim results showed.

Downstream margins have improved considerably since last year, largely due to more timely domestic retail oil product price adjustments by the National Development and Reform Commission that closely track oil price changes, along with relatively lower crude prices. However, poor domestic demand continues to weigh on the companies, analysts said this week.

In particular, gasoil demand, which makes up the largest slate in China’s oil product mix, has been weak.

While demand for oil in the United States has been moderately strong, it has not been remarkably high, which additionally begs the question about price.

Syria’s troubles are unique. There is no evidence they will spread, at least in a fashion that will affect supply. So why an increase in prices?