A U.S. airstrike in the Middle East drew the condemnation of Russia and Iran, but oil futures quickly gave back much of the knee-jerk gains, showing that pricing a meaningful geopolitical risk premium back into the crude market remains elusive.
West Texas Intermediate crude the U.S. benchmark, and Brent crude the global benchmark, both jumped by more than 2% to notch one-month highs in electronic trade after U.S. warships launched more than 50 Tomahawk missiles in an attack on a Syrian airfield. The move was meant to punish the regime of Syrian leader Bashar al-Assad for a chemical gas attack that killed scores of civilians earlier in the week and marked an about-face on Syria by U.S. President Donald Trump.
The rally faded Friday morning. Oil futures ended with solid gains, but off those earlier highs.
The knee-jerk move higher was in line with an underlying bullish bias in the crude market that has seen traders look past swelling U.S. oil inventories to focus on output cuts by major producers, including the Organization of the Petroleum Exporting Countries.
Bullish traders used the strike as an excuse to bid the market higher, but barring a further commitment to military action, it isn’t clear that a premium is warranted, said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, in a phone interview.
The overnight market reaction was “buy bonds, buy oil, buy gold and ease up on your equity position. But it wasn’t much of a risk premium if you look at the absolute level of volatility given where we are and what happened,” Haworth said.
Instead, the overhang of U.S. supply and rising production should serve to keep a lid on oil prices, he said.
Military action in the Middle East, which accounts for around 40% of global oil production, always carries the risk of pushing up oil prices. But Syria, following years of bitter civil war, produces virtually no oil—down from around 400,000 barrels a day in 2010, according to Thomas Pugh, commodities economist at Capital Economics.
The initial jump in oil prices reflected worries the conflict cold spread to major producers nearby, such as Iraq, and that the Trump administration could be taking a more interventionist approach throughout the region.
Meanwhile, Russia suspended a 2015 agreement with the U.S. designed to avoid close calls between Russian military planes used to support the Assad regime and U.S.-backed rebels. The Kremlin condemned the airstrike as “aggression against a sovereign government” under false pretenses. Iran also condemned the attack.
Russia and Iran are major oil producers, responsible for around 11 million barrels a day and 4 million barrels a day, respectively.
“The reaction of these two countries to the military strike will be a big determinant of prices over the next few days but the latest events make it even less likely that the U.S. will remove sanctions on Russia, imposed after its annexation of Crimea,” Pugh said, in a research note. “What’s more, Iran’s support for Assad could increase concerns that President Trump will reimpose sanctions on Iran’s oil production.”
Barring an escalation of tensions, prices could fall back in the near term if Libya, which recently restored production, continues to come back on stream and there is no further escalation of the conflict in Syria, said Pugh, who expects oil to rise toward $60 a barrel in the second half as growth in demand rebalances the market and pulls U.S. inventories back toward their five-year average.
But Helima Croft, global head of commodity strategy at RBC Capital Markets, said relations between Moscow and Gulf countries that have backed the anti-Assad rebels also bear watching given Russia’s crucial participation in the agreement between OPEC and major non-OPEC producers to limit production.
“Up to this point, Russia has been able to maintain its support for Assad and warm relations with Iran, all while concluding arms deals and energy cooperation agreements with countries like Saudi Arabia,” she said, in a note. “Therefore, Syria was not an intractable obstacle for Moscow in working with key Sunni states. However, it will be important to watch whether Syria does emerge as something of a deal breaker in the wake of the conflict’s altered dynamics.”
She said the strikes could also alter the dynamics of May presidential elections in Iran, perhaps giving the country’s supreme leader, Ayatollah Ali Khamenei, incentive to tip the scales against President Hassan Rouhani’s bid for a second term in favor of a more hard-line candidate, potentially imperiling the nuclear deal and sanctions relief that has allowed Iranian oil exports to resume.
Croft agreed that if the airstrikes prove to be a one-time event and aren’t followed by a serious effort to oust Assad, the implications for the oil market will remain “negligible,” but that it’s too early to sound the all-clear signal.
Given that Trump “had previously signaled deep disdain for humanitarian interventions and Middle Eastern military engagements, we are now in uncharted waters and we think that many of our earlier prevailing assumptions about the implications of the conflict in Syria may be upended,” she said.