Oil Forecast: The "Syrian Premium" Is Not Temporary

By an apparent agreement to place its chemical weapons under international control, Syria seems to have dodged an imminent American military attack.

Yet even as the world takes a step back from the brink, three critical questions still remain:

Will Syrian President Bashar Assad hand over all of his chemical weapons? Will the proposed international control mechanisms satisfy Washington? Will the final result contained in the U.N. report on the chemical weapons use outside of Damascus alter the outcome?

Of course, until the latest news hit, one result had seemed certain: The global oil market was bracing for higher prices. West Texas Intermediate (WTI) closed at a 28-month high on Friday, while Brent crossed the $116 a barrel level.

Following the agreement, that trend has reversed, sending oil prices in both New York and London lower.

But has this crisis really been defused?

Just look at oil prices, and where they're undoubtedly headed...

Calculating the "Syrian Premium"

The developing tensions have added a "Syrian Premium" to the price of oil. By my best estimate, this "crisis premium" was $4 a barrel in New York and $8 in London.

In other words, absent this premium, WTI should trade at about $103 a barrel, while Brent should trade near $107.

As of Tuesday, that premium stands at $4 in London and $3 in New York, down 50% and 30% respectively off of Friday's close.

Given Syria's place in the energy markets, that is the most direct way the crisis has impacted the energy sector.

But it is hardly the only effect.

The truth is the market has no genuine way to determine the degree of volatility resulting from what is an unknown level of instability.

Needless to say, that is usually a formula for an increase in price beyond what the market fundamentals would sustain.

How long the spike remains depends on the level of uncertainty. At the moment there are more questions than answers.

And despite this morning's news, that uncertainty is not likely to be receding anytime soon.

That is because, absent a "palace coup" to unseat Assad in Damascus, nothing was likely to happen this week to reduce the tension. Congress is back in session, but the Obama Administration is still faced with a very close vote on obtaining a Congressional approval for any strike. The specter of Iraq still weighs heavily on both sides of the aisle.

It is the same case in London, where Parliament has made it clear it will not agree to support a missile strike until the U.N. team reports findings that chemical weapons were used. That may well not take place until the end of the month, although there are likely to be leaks of the main points beforehand.

France and Saudi Arabia may have already declared support for military action, but there has been no approval for any other EU or Gulf Coordination Council member state.

Meanwhile, Moscow is pledging ongoing support for Assad (while also leaving the door open to apply U.N. Security Council-sponsored pressure against the Syrians should the U.N. report justify such a move).

In short, before the news, this week had been shaping up as one of accelerating rhetoric from the White House, considerable lobbying on both sides of the issue, and a continuing impasse.

What's Our "Goodbye Code?"

Of course, President Obama could authorize a strike without the permission of Congress. But the domestic political environment in the U.S. would not support that decision.

There are clear misgivings emerging these days over the proper American position in what is a civil conflict in Syria and little support for another open-ended military excursion into the region.

That seems to be the gravamen in all of this political maneuvering and rancor. It also reminds me of a basic rule in my earlier career.

You see, in the intelligence business, you always wanted to have what we called a "goodbye code."

A "goodbye code" was the way you intended to get out of whatever situation the higher pay grades were about to put you into. It was a basic element of strategy and the primary foundation for whatever tactics we introduced to meet our objectives.

Recent American excursions - Viet Nam, Iraq, and Afghanistan - have been light on this front. What is the objective? How do we limit our involvement to meet that end? And, most importantly, how do we prevent "mission creep?"

This is what happens when what is set up to reach an objective ends up having a life of its own. It expands into something more than initially contemplated. Means become an end in themselves, clouding the goals and the ability to wind down involvement.

Nobody in Washington wants another "boots on the ground" deployment, or a multi-year commitment to overthrowing another two-bit dictator.

For their part, the wide majority of the U.S. population needs something in addition to the acceptance that Assad is a nasty fellow. No argument there.

But what is the specific American objective, and what is our "goodbye code?"

To date, the administration has not been forthcoming here. A strike means we would be injecting U.S. power into a civil war in what is already a regional pressure cooker, a move that would certainly change the dynamics for all of the countries bordering Syria and the integrity of crude oil export routes.

No Quick Answers Here

That brings us back full circle to how this will play out for energy investors.

The truth is there will be no quick answer to anything in Syria. The talking heads will continue their banter on TV (I gave my views yesterday on Fox Business). However, there will be no resolution of the instability.

And that means oil prices will continue to rise.

It is too early to make any meaningful forecasts about how this will impact the economy as a whole. What we do know is this: There will be an observable negative pressure on economic recovery should those prices rise too quickly.

My guess this morning is that a level of $120 a barrel in New York would probably result in a market pullback, although hardly a move into another recession.

Still, hedge funds are already placing bets on higher gold prices in anticipation of higher oil levels. This is merely a result of something I identified here in Oil & Energy Investor several months ago about how oil is becoming the new "gold standard."

Oil is now playing the tune that gold dances to, with the rest of the market following closely behind.

At least until Tuesday...

Until the specifics are in, however, the proof this situation has been defused is in the details.

And those may now be set, at least initially, not in Washington or Damascus but in Moscow.

Next: Here's How to Play the "Syrian Premium"

The full article is reserved for Money Morning subscribers.
To continue reading, sign up now. It's absolutely free.

(After you submit your email address, we'll return you to the full article.
You'll get a "welcome" email that explains the benefits of your subscription.
You can cancel at any time.)