In the last three weeks oil markets have gone to the brink and back. Early this month, the concerns over a U.S. led military strike on Syria and the loss of ~1.2 million barrels per day ("mb/d") of Libyan crude send Brent oil prices to $117 per barrel high and fueled talk of further rallies and a Strategic Petroleum Reserve ("SPR") release in case the Syrian war spills over to other countries or the Libyan crisis extends. However, the oil market is more relaxed now due to various reasons, which we will discuss in this article.
First of all the tail risk is removed. The two main foes of the cold war era, the United States and Russia, have surprisingly found a diplomatic solution to the problem that may eventually end in fewer chemical weapons in control of the Assad regime, which is more likely to use them again on its own people. To put it simply, the Obama administration may end up winning a battle without fighting for a war. For oil markets, the important thing is the spill-over risk that has been present since the civil war broke out about 2 years back, but was substantially increased recently, has now receded significantly.
While many have mourned at the prominent role of Russia, we think as far as global oil supply and demand balance is concerned, Russia's involvement reduces greatly the chances of a sudden escalation of the Syrian crisis. There are also hints that another attempt will be made to solve the much thornier issue of Iran's nuclear ambitions through a diplomatic solution. The U.S.-led sanctions are keeping more than 1 mb/d of Iranian oil off markets.
Another reason that has relaxed the oil markets somewhat is the news that some Libyan exports may resume shortly. Officials in Libya reportedly alerted traders that three western export ports, and the corresponding oilfields to their south, should be re-opened very soon. This means in theory a combined ~500 kb/d of capacity, which is roughly one-third of Libya's upstream total. However, one should keep in mind that this is only a promise, which is yet to be delivered. The situation in the east of Libya seems nowhere near resolution.
As international tensions surrounding the Middle-east, particularly Syria, cools off oil markets have settled back into a familiar range once again. While the probability of an immediate U.S.-led military intervention in Syria has eased for now, it is still expected to remain on the market's radar, given the contagion risks the event holds for other supply centres in the region, most notably Iraq. While diplomatic efforts to avert an immediate military intervention in Syria have led to the market re-pricing a geopolitical premium for now, the current state of global balances suggest that Brent prices could once again trade within the limits of its pre-crisis range, until the next geopolitical trigger takes shape.