WITH the US, the UK and France opting to hit Syria — and the Russian envoy in Washington insisting, “We are being threatened. We (had) warned that such actions will not be left without consequences,” — almost half of the world’s crude supply is at risk — making the risk premium only go up.

Even before the action, the mere anticipation that US President Donald Trump can’t back off and would have to act resulted in both US crude and global benchmark trading at the highest levels since 2014.

The initiation of Western action against Syrian President Bashar Al-Assad’s regime made the crude markets more nervous and edgy. Where would this spike end is difficult to say. At the moment the price trajectory seems only up and up.

The evolving Syrian war theatre made the risk factor jump considerably. Last week, Syrian government forces allegedly used chemical weapons against civilians, killing dozens and wounding hundreds. Political temperatures flared up. President Trump immediately vowed to fire missiles at Syria. Trump also criticised Moscow for standing by the beleaguered Assad. This drew Moscow’s ire. A chain reaction began, with Russia vowing to respond.

Interestingly, the war theatre against the Assad regime heated up, immediately after the visit of the Saudi crown prince Mohammad bin Salman (MBS) to London, Washington and Paris, signing hundreds of billions of dollars of purchases at each stopover. The attacks seem to have fulfilled Riyadh’s long-held desire of active western military involvement in Syria to get their foe – Bashar Al-Assad.

And while Syria is in flames, other factors are also impacting the crude markets. The Houthis in Yemen appeared stepping up the campaign to lob missiles at Saudi targets, including an oil tanker in international waters. Saudi Arabia defence forces reportedly intercepted three missiles over the capital Riyadh and the border city of Najran. Crude markets were mindful of these developments.

Although, the missile attacks by Houthis aimed at Saudi Arabia’s civilian areas and oil facilities have not been successful, yet they were a provocation to Riyadh, at a time when the rift in the Middle East seemed widening. At stake was the very image of MBS.

In the meantime, in the context of the recent developments, the possibility that President Trump may not renew the Iranian nuclear deal is only growing. The induction of former UN Ambassador John Bolton as national security advisor seems to have made it more likely.

“The nuclear agreement with Iran is already in the emergency room. It is very difficult not to see Trump move in a direction where he pushes the US to withdraw from the nuclear agreement. (That’s) very meaningful for oil markets and very meaningful for geopolitical stability in the Middle East,” Ayham Kamel, head of Eurasia Group’s Middle East and North Africa practice, told the CNBC.

Crude markets are cognizant of all this.

The overall scenario could thus erupt any time, pundits remain concerned. “We’re at the pivot point. It’s a binary outcome. If it’s a pinprick in Syria, we’ve seen the price gains. We’ll sell off afterwards. If Iranian assets, in particular in Syria, get hit, it’s a game changer,” John Kilduff, energy analyst and founder of Again Capital was quoted as saying.

“If this is all contained to Syria we’ve probably seen the bulk of the rise. The issue you get into is if there’s a strike on Iranian assets in Syria, a direct hit on Saudi, or a scenario where the Saudis and Israelis team up to take it to Iran directly, that’s where you get into triple-digit oil price land,” Kilduff underlined.

Others too agree. Oil would rise much higher if the proxy war escalates to a real war between Iran and Saudi Arabia or Israel, says Helima Croft, global head of commodity strategy at RBC. “To me, I was more worried about the tanker. ... That raises the whole prospect of that critical waterway not being viewed as secure. Five million barrels of crude and refined product (per day) now has to be considered at risk,” said Croft. “That’s what goes through the strait (Hormuz).”

“Certainly geopolitical risk is back in the price, and what happens to Syria could certainly stoke prices. It’s not only Syria. It’s also the May 12 deadline on reviewing the Iran deal,” said Daniel Yergin, vice chairman of IHS Markit. “But it’s not only the Mideast. It’s this new tension between the United States and Russia, two of the world’s three biggest oil producers.”

The US imposed a new round of sanctions on Russia this week for its election meddling. Fault lines are getting to the fore, in and beyond the Middle East.

Crude markets are definitely not oblivious to all this.

Published in Dawn, April 15th, 2018