Report Predicts 'Syrian World War' Oil Price Spike

Despite the Middle East and North Africa (MENA) region being the world's most food import dependent region – and needing to pay for food with oil exports – Societe Generale has been quick to beat the drum for a “mega spike” of oil prices. Its by-line is the coming “Syrian World War”.

Michael Wittner at Soc Gen has produced a special 3-page note for high net worth clients, August 28, on the French bank's readout of what the “limited punishment strike” against the al Assad regime might mean for the oil market. He believes there could be relatively durable “spillover” from a Western air and water-based attack, but his report firstly said made it clear that Syria itself is not a real player in the oil market (see my article of July 14, 'Syria, Egypt And The Middle East Oil Price Risk Premium').

Wittner like others is constrained by reality to say the bank's concern, and the reason why it is buying oil futures and is bullish on the spike, is of “spillover”. That is both political and economic contagion or contamination as insidious as, if slower-acting than chemical weapons. Syria's own very small and declining status as an oil producer and exporter “is not the issue”. Wittner however believes in particular the main MENA regional focus of spillover contamination, raising oil prices, will be Iraq, forgetting the already powerful and real spiral of decline in Libyan oil output and exports (see my article of August 24, 'Libya Moving From Arab Spring To Arab Winter ').

SocGen's Wittner, in only three pages produces an apocalyptic video game scenario easily comparable to the so-called “Lehman Bros moment” of 2008 which, we can note, sent the price of Nymex crude from $130 per barrel to $39 per barrel in short order. The oil price shock was downside in royal fashion, and not at all to Royal tastes in the petrodollar-rich Gulf States currently financing their own Sunnite proxy war in Syria – with military support from the US, French and British.

Wittner's scenarios of spillover from the “Syrian World War” start with an initial stage sending Brent-grade oil to around $130, potentially followed by an upside scenario reaching $150 per barrel, this upside case needing a certain time for spillover effects to start affecting Iraq.

WHAT GOES UP COMES DOWN
Totally unlike gold where long-term global financial and monetary instability, as well as basic mining breakeven costs dictate a price of about $1500 per Troy ounce, oil faces no such factors – or headwinds other than geopolitical insecurity, especially in the MENA region. Longer-term average oil prices on an equilibrium basis are likely no higher than around $80 per barrel.

Wittner's claim, and suspiciously precise forecast of Syrian war spillover effects in Iraq lead to a decline of 0.5 to 2 Mbd in Iraq's oil production, “as disruption rises”, but this forecast has to be set against the global macroeconomic impacts of massive geopolitical instability – and rising oil prices – leading to a sharp decline in oil demand. When this happens, as in 2008, oil prices will tank.

Again unlike the oil price spike of 2007-2008, this time we are pricing-in the risk of military action by the US, France and UK, already and officially described as being punitive and “not intended to overthrow Bashr al Assad”. One risk, of course, may be a rogue cruise missile slamming into al Assad's bunker!

As we also know as of today (August 28) the talk from Washington, Paris and London is so tough that the option not to attack almost does not exist any longer. The coalition being assembled reportedly includes the US, the UK, France, Germany, Canada, Turkey, Israel, Saudi Arabia, Qatar, and Jordan. While Israel is glaringly present but never referred to, in “government friendly” media, glaringly absent is Iraq.

Why this country would specifically be first and hardest hit by “spillover” is a question for Michael Wittner.

To be sure the US, France and UK would be seen as very weak for not keeping their word if they backed off, but Vladimir Putin and Xi Jinping may help them do this. Alternatively, the “punishment raid” may be toned down but still appear awesome with photoshop help on the grainy official newsreel footage after the 72-hour attack. Only if Iran can be drawn into play – as Wittner believes is possible – would we be facing a real Syrian World War.

Also needed for the oil spike forecast by Wittner, the military action against Syria would have to move on from 'surgical' cruise missile strikes on military targets not directly related to chemical weapons complexes in Syria, to the establishment of a no-fly zone, as in Libya, designed to protect rebel forces and civilians. As we know – and Security Council members Russia and China know - Libya's no-fly zone was “liberally interpreted” by NATO to allow attacks on government ground forces, as well as massive bombing of government-held towns and cities.

EXPORT OIL – IMPORT FOOD
The US and its Western allies – but certainly not the Gulf State backers and paymasters of Syrian civil war – do not want to be involved in this broader civil war where most firepower, manpower and effective military opposition to the Syrian government regime is among hard-line “Islamist” bands and fighting groups. Analysts say this decision is due to lessons learned in Iraq, Afghanistan, Yemen, and Libya.

Presently, the question has no answer, but long before the answer time the oil price spike and collapse will almost certainly have played out. Syrian oil production and exports have fallen by about 85 percent since 2010, making it certain that whatever political arrangement follows the al Assad regime, if it falls, Syria will need to find a way to pay for food imports – and Syria, as it happens, is one of the least food import-dependent nations in the MENA.

Conversely Iraq is heavily dependent on food imports, which have more than doubled as a percentage of total food supply, by value, since 2003.

For Soc Gen's Wittner, what he calls the Sunni-Shia war in Syria has a direct parallel in Iraq, where a long-running proxy war opposes Shia Iran and the Sunni Gulf States, as well as internal domestic sectarian as well as organized crime syndicates' conflicts. Its northern oil export pipeline carrying Kirkuk grade oil to Ceyhan in Turkey has been repeatedly attacked for the last 3 months, reducing this export route's capacity from an average 0.35 Mbd to less than 0.2 Mbd.

The “big one” for Iraq is Basrah grade oil exported through the southern Basrah port complex to the Persian Gulf, presently running at over 2 Mbd.

Wittner has to explain how – in the absence of Iran being drawn into the Syrian war, a likely hidden goal of Western, Israeli and Saudi policy – there will be a spread of Iraqi civil violence to the south. Wittner's argument is that also food import-dependent Iran may choose to stir up such attacks, in order to hurt the economies of the Western countries by causing an oil price spike. One question is why hasn't Iran already done this, in the past?

Wittner's note for Soc Gen hedge fund investors suggests that Saudi spare capacity, of he says 1.7 Mbd, will not be able to cover the Syrian war spillover effects that he forecasts in Iraq, making way for Brent grade oil hitting $150 per barrel. Wittner does however admit that the oil price surge will not last. He says “several factors or mechanisms....would limit the duration of any price increase”, among them global oil demand destruction which he says will become visible quickly, within a couple of months.

At the spike-and-surge price level he forecasts, we can note, oil would be priced at considerably less (in real terms) than it was able to achieve in 2008.....with no chemical weapons and only the toxic help of Goldman Sachs!