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While the geopolitical risk has been falling in Europe as European governments and central banks stepped up to ease Eurozone tensions, the latest events in Syria have raised the temperature and the ugly geopolitical risk has raised its head again.

The growing possibility of some form of a limited U.S. led strike in Syria has increased fears about the stability of the world's key oil producing region. Until the nature of the possible military intervention becomes apparent, these concerns are likely to put upward pressure on oil prices.

There is no doubt now that the events of 21st August in Syria are seen to have crossed the Obama Administration's self-imposed red line. The popular perception is that, despite opposition from China and Russia, the United States must respond in a visible manner or lose all credibility when it comes to deterring the development, or use of weapons of mass destruction; especially by Iran. It is highly unlikely that the UN Security Council would approve of any strikes; however, U.S. legal advice suggests that intervention could be justified on humanitarian grounds. Although the limited strikes look more of a certain thing now but how far will the U.S. go remains uncertain. The general public opposition both within the region and in the western countries, highlighted by David Cameron's loss of the vote, has created more uncertainty.

The possible form of military action, often reported in the media, using sea-based cruise missiles or an air-launched equivalent to hit targets in Syria and the list of those possible targets (chemical weapons facilities, command and control infrastructure, as well as political targets) are unlikely to put any additional crude oil supplies directly at risk. Syria is not a large producer of oil and the country's oil production has declined to a trickle of 50 kb/d, compared to pre-2011 levels of 350 kb/d. Syrian oil ministry quoted 1H13 production of only 39 kb/d but it remains unclear if this reflects only production from assets in government-controlled areas.

As long as any intervention is fleeting and there is limited international spillover or retaliation, economic and market impact is likely to be relatively soft. While there is uncertainty and it may push oil prices higher; however, fundamentals should reassert themselves fairly quickly once the issue has come to a head. There are a very few assets at risk in Syria and as long as the conflict doesn't widen, it is unlikely that any limited U.S. strikes would have a significant effect on the oil supply and demand balance.

However, if in response to a U.S. led military intervention, the Syrian regime or its allies decide to widen the conflict, the oil market impact could be greater. One possible target could be the Turkish port of Ceyhan, which is only 50 miles from the Syrian border. Any widening of the conflict is unlikely though because it does not appear to be in the Assad regime's interest to provoke further their more militarily strong neighbors.

Bottom Line

Oil markets have reacted strongly to the deteriorating situation in the Middle-East and prices have spiked sharply due to the unpredictable consequences of a likely military action against Syria. Brent crude spot is currently trading at a six-month high of $115 and prices are expected to remain volatile leading up a military strike on Syria. However, prices could fall sharply after a strike, as the actual supply losses remain small and the chances of a violent response from Syria, Russian, or Iran also remain low. Nevertheless, unpredictable factors weigh heavily in the market for good reasons.

Source: Oil Prices Could Fall Following A Limited U.S. Led Strike In Syria