Oil Rises and Equities Fall as Tension Builds Over Syria

Oil

Source: http://www.flickr.com/photos/ollesvensson/

It seems like it’s only a matter of time before international diplomacy breaks under the immense geopolitical tension building in the Middle East. U.S. Secretary of State John Kerry has accused the Syrian government of using chemical weapons against opposition forces, in the process committing “indiscriminate slaughter of civilians.”

“By any standard, it is inexcusable,” he said at the State Department in Washington on Monday. “It is undeniable.”

The situation has satisfied the conditions for U.S. military intervention in the region, and reports from nearly every corner of the world indicate that some sort of action is imminent. Syria — which is bordered by Iraq on the east, Turkey on the north, and touches Israel on the southwest — has been engaged in a brutal civil war for more than two years. The country claims traditional allies such as Iran, China, Venezuela, and Russia, and has been led by President Bashar al-Assad since 2000.

The Syrian uprising has taken center stage as one of the most disruptive and violent ongoing conflicts. In June, the United Nations estimated that the conflict has claimed 100,000 victims. And now, with the threat of outside military action looming, the footprint of the fighting is expected to expand. Within the nation itself, the Syrian government has promised that its defense against foreign military action would “surprise” the world — something many fear means the use of more chemical weapons.

Foreign military intervention likely spearheaded by a long-reluctant U.S. is expected to spill over Syrian borders, both politically and physically. Syria’s proximity to Iraq and Iran — which together account for nearly 20 percent of the output for the Organization of Petroleum Exporting Countries — means that the action could agitate the already volatile political environment.

The markets, in their own way, are beginning to anticipate the fallout. Equities around the world have been on edge for months — years, maybe, depending on who you ask — because of the financial crisis and the dubious monetary situation that has developed in its wake. Some market observers have cited the building tension in Syria as a reason for recent negative market sentiment.

Petroleum in particular has been in the spotlight. Although Syria is no longer a significant producer or exporter of oil — the U.S. Energy Information Administration reports that the country produced just 157,158 barrels per day in 2012 — the country has been seen as a potentially significant transportation hub for years, and foreign involvement could disrupt production and transportation in neighboring countries.

Syria crude oil production (1980-2012) pic

As a result, crude oil prices have increased dramatically. WTI crude oil for October delivery increased about 3 percent on Tuesday to $109 per barrel. Brent crude for October settlement also increased about 3 percent, to $114 per barrel. Prices are ostensibly reacting to comments from Iranian Foreign Ministry spokesman Abbas Araghchi, who told reporters in Tehran that foreign military involvement in Syria would “engulf the whole region.”

Major international oil and gas companies like Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), and BP (NYSE:BP), already facing market headwinds, have suffered on the news, falling between 5 percent and 8 percent on the stock chart over the past month.

On Tuesday, as reports circulated that President Barack Obama is considering military options, U.S. equities declined. The Dow was down nearly a full percentage point, the S&P 500 was off about 1.5 percent, and the Nasdaq was down nearly 2 percent.

OIL2223

Source: U.S. Energy Information Agency

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