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Brief background on why the Syrian conflict affects oil prices

Ingrid Pan, CFA

Understanding Syrian tensions and how they affect oil prices (Part 2 of 3)

(Continued from Part 1)

Syria’s civil war

Syria entered into a civil war in 2011, which began with anti-government protests that escalated into a full-scale conflict. Protestors eventually demanded the resignation of President Bashar al-Assad. Violence between al-Assad supporters and his opposition turned into a long and bloody engagement.

Recently, in August, allegations came out that the Syrian government used chemical weapons against its own people, which violates international law. Following the attack, other countries, including Britain, France, and the United States, tried to determine the best way to deal with Syria. Meanwhile, Russia has expressed its opinion that the attack wasn’t carried out by the Syrian government, but by rebel forces. It’s worth noting that Russia has generally supported President al-Assad and his government throughout Syria’s civil conflict.

Impact on oil prices

In response to the chemical attack, the United States pondered military action against Syria. The escalating Syria tensions caused oil prices to increase to elevated levels, as markets feared the possibility of supply shocks throughout the Middle East. Syria itself doesn’t export significant amounts of oil. But the country is close to Iraq and Saudi Arabia, as well as the Suez Canal—a major transportation throughway. Military action in Syria has the potential to disrupt normal oil production and transportation operations throughout the Middle East. Plus, unrest in one region can easily spread to unrest in neighboring regions, as we saw with the 2011 Arab Spring movement. In response to this volatility, WTI oil prices over the past month have been consistently over $105 per barrel—some of the highest levels since March 2012. High crude oil prices generally translate into higher earnings for oil producers such as ExxonMobil (XOM) and Chevron Corp. (CVX). Energy ETFs such as the Energy Select SPDR ETF (XLE) and the Vanguard Energy ETF (VDE) also comprise various companies that benefit from elevated oil prices.

Continue to Part 3

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