Syria Deal Could Save Oil Bulls

Includes: OIL
by: Dana Blankenhorn


Russia and the U.S. have signed a cease fire deal for Syria in Munich.

If it leads to changes on the ground in Syria, deals on oil production could follow quickly.

You don't get a reversal until you peer into the abyss.

Skepticism is warranted, but a cease fire deal for Syria worked out in Munich yesterday among the U.S., Russia and other powers supporting the various combatants could turn the oil market (NYSEARCA:OIL) around.

The deal came after Geneva talks among the parties directly involved in the conflict failed, leading some to call the Syria problem "insoluble", and as allied criticism of U.S. policy there grows louder.

It is estimated that 470,000 people - 11% of the population - has been killed or wounded in the war. (Imagine nearly 40 million Americans dying in sectarian conflict.)

Syria matters to oil prices because oil is being used as a weapon of war by Saudi Arabia and its allies, and Iran's deal on nuclear weapons opens the possibility of still more supply, this time aimed at cutting off the Arabs' ability to spend. While the oil war has hurt the U.S. economy, it has absolutely crushed Russia, and all these groups have to sign on to a cease fire for it to become effective.

Until this announcement, the news from Syria had been unceasingly bad. Russia is being accused of going to war against Europe through Syria. Arabs are talking about entering the conflict directly. Turkey is said to be entering the conflict.

There is danger of the conflict spiraling out of control. But just as markets often turn just as an abyss is approached, and players look into the trench, so it may be with Syria. A cease fire deal, if it can become facts on the ground, would give the Arabs, Iranians and Russia an opening to agree on production cuts aimed at rebuilding their economies, and coincidentally cause a dramatic rise in oil prices that could save a few U.S. companies from bankruptcy.

A production deal would raise inflation, but also allow interest rates to return to normal levels, before probably rising through those levels and beginning a dangerous inflationary spiral as early as this fall. My own analysis of the market, going back to 2011, saw renewable energy impacting oil prices only in 2017 or 2018, and the current glut is having the effect of pushing that date out to 2019. In other words, the coming oil boom - if it comes - has a sell-by date.

West Texas Intermediate fell below $27 yesterday but rose again on rumors that production cuts may be coming, so a return to $40/barrel could follow within a few weeks if the cease fire is implemented and real peace talks begin.

Some options on solvent oil producers would be one way for active traders to hedge against the possibility of peace. For small investors stuck with oil, oil service, or oil pipeline shares, it might be wise to hang on a little longer in hope the cavalry can yet bail you out.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.