Oil Prices: This Deal Could Send Oil Prices Soaring

As we suggested a few weeks ago, an international agreement over Syria would help boost oil prices. This is an early effect of the agreement that U.S. Secretary of State John Kerry, his Russian counterpart Sergei Lavrov, and representatives from 17 countries signed in Munich. Oil prices opened above $27.00 per barrel in Asian markets and touched their lowest since May 2003—$26.21. Brent futures rose $1.33 to $31.39.

It’s no fluke that the marathon talks of the so-called International Support Group for Syria, which ended on February 11, coincided with an opening from a key OPEC state. United Arab Emirates (UAE) Energy Minister Suhail Al Mazrouei said OPEC now hopes to collaborate with other producers to stabilize oil markets. (Source: “Crude rallies into the weekend amid hope for production cuts,” BNN, February 12, 2016.)

The agreement to stop hostilities has tempered Saudi Arabia and its plan to invade Syria. Russia warned that direct Saudi military action in Syria would promptly destabilize the oil market. (Source: “Russia: Saudi Ground Troops In Syria Could ‘Immediately’ Destabilize Oil Market,” Oil Pro, February 9, 2016.)

The Syria agreement now makes the Saudi intervention unlikely. In fact, it has opened the path for more constructive talks between Russia and Saudi-controlled OPEC. There are much higher chances now that such talks could deliver an agreement to cut output.

British newspaper The Guardian reported that the Saudis wanted to take a more aggressive stance in Syria. The kingdom says it is ready to deploy thousands of soldiers to fight against the Islamic State, perhaps in coordination with Turkey. (Source: “Saudi Arabia offers to send ground troops to Syria to fight ISIS,” The Guardian, February 4, 2016.)

Russia and the United States have exchanged troubling signals.

Neither President Obama nor President Putin intends to get anywhere close to a direct confrontation. In fact, the talks suggest that they want to engage in easing the current indirect conflict. The Russian economy is fragile. The American one is at risk. Obama does not want to engage his people in a new war after getting a Nobel Prize…for a non-existent peace in the Middle East.

Russia and the U.S. appear to be shifting into a more diplomatic mode. They may have actually agreed to end the conflict in Syria. Moscow would keep its important role in the Middle East and a strategic base in the Mediterranean. President Obama can score one for the good people in Washington.

He can claim to have won the war by opening the way for a new, if not exactly a democratic one, in the Middle East. In fact, Obama would be taking a major step back, one that even Rand Paul might like. The U.S.-Russia agreement has opened the way for OPEC and Russia to hold fruitful talks on oil prices.

The agreement still leaves enough tension between Sunnis and Shiites to fuel the perception of oil supply risk. Iran, Saudi Arabia’s Shiite archrival, would certainly oblige in taking part in this oil version of the Cold War.

As for Syria, the ceasefire talks worked, because the arrangements do not really spell the end of hostilities. Russia will continue to bombard Islamic State positions—and other rebels—in order to complete its offensive on Aleppo. This will allow Damascus to resume control over much of eastern Syria.

The Munich talks also worked because they were more modest. The goal was to revive the actual, but deadlocked, peace talks that ended last week. The participants reaffirmed their commitment along vague lines. They agree to encourage a political transition when the conditions on the ground improve.

This is still good news for oil futures.

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