Crude Finds Friends Among Rumors of War

September 9, 2013 05:38 AM

As the United Sates ponders strikes against Syrian forces for chemical weapons attacks, crude oil investors are watching the situation with great interest. Syria is not among the world's largest exporters of crude, providing just 9% of the world's exports in 2010. In fact, experts believe that within the next ten years, rising domestic crude consumption will force Syria to make the switch from a net crude exporter to a net importer.

Currently, the top two sendout destinations for Syrian crude oil are Germany and Italy with France and the Netherlands rounding out the top four. If conflict in Syria elevates crude pricing, the European financial recovery could stall and that would lower crude demand from major OPEC producers' customers.

Saudi Arabia currently has the most production capacity to spare of all OPEC producers and as WTI prices have held Brent aloft, Saudi production has tapered. If a Syrian conflict floats Brent prices above $130 a barrel, Saudi Arabia and other OPEC producers are expected to nurture European demand by limiting prices from the production side.

"The Saudis will not act with oil at $110 or even $120 dollars a barrel. Indeed, the Saudis are happy with oil at $110-$120 a barrel," Sadek Boussena, special energy advisor to Societe Generale and a former OPEC President told the French banking industry on Friday. "But if prices rise above, say, $130 dollars a barrel, the Saudis in particular may think this is too high [which] could choke off global growth and hence oil demand."

Demand is strong in the $110-$120/barrel range for Brent crude and that will keep OPEC production levels close to their current clip. But if oil prices turn sharply bullish, crude production in the region is easily ramped up, and the market believes it can moderate pricing into importers' 'go-zone'. This will limit E.U. electricity rates and gasoline prices and keep crude buyers in the market.

This all may be a mute point as investors eye the unfolding conflict as an opportunity. Market watchers believe investors are still too heavily vested in the long side of Brent futures, and that may create an overhang that would leave investment money hung out to dry if a conflict spike fails to materialize.

The other possibility is that technical traders would look to sell on a spike and deflate pricing that way on a 'buy the rumor, sell the news' run. Data from the U.S. Commodity Futures Trading Commission last week showed a 3.6 percent decline in net long crude positions, signaling the prevailing attitude on Wall Street has crude headed higher.

With WTI opening today at $110.28 and Brent at $116.10, most believe the fear premium has yet to figure in to the cost of a barrel of oil. However, with traders looking to cash in on the long side of crude futures and OPEC producers led by Saudi Arabia positioned to answer any price based demand falters, a spike in crude pricing could as easily be mitigated by investors as producers.



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