Why Syria Matters To Oil Prices and Your Money

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September 4, 2013 12:41pm NYSE:DBO NYSE:USO

oil-etfGarrett Baldwin: As U.S. military personnel prepare for possible action against Syria, Brent oil prices are hovering near an 18-month high.

Recently, Brent oil prices retreated slightly, but remained elevated, after starting the day above $116 a barrel. Prices for West Texas Intermediate (WTI) also retreated by a little more than 1%, closing the day at $108.80.

Brent prices have climbed steadily following escalations across Egypt and the ousting of President Mohamed Morsi.

Meanwhile, in the United States, improved infrastructure and greater network access have fueled WTI prices to near par with Brent this month.

But Brent prices have spiked this week following news that the West may intervene in Syria, where a chemical attack was allegedly launched against civilians.

Despite warnings from Russia and China, it remains unclear whether the United States will intervene. However, any action is likely to set off a chain reaction across the Middle East and could affect trade within the region, especially on oil shipments.

Here are the details on how Syria affects oil prices, what that means for you – and how to profit.

Why Syria Matters to Oil Prices and Your Money

The situation in Syria is distinctly different from previous conflicts and unrest in the Middle East. That’s because Syria is a very small producer of crude.

In fact, the country’s exports have been heavily restricted by the U.S. and European Union sanctions, and its infrastructure has been crippled due to civil conflicts across the country.

Today, Syria’s oil output is less than 100,000 barrels a day, a steep drop from the 400,000-barrel output it offered two years ago before its civil war began.

But Syria’s importance to the global trade falls under two areas…

First is its religious culture. Potential war would likely aggravate tensions in oil-producing nations with large Shiite populations. This includes nearby Saudi Arabia, Kuwait, and even Nigeria thousands of miles away.

Second, Syria’s proximity to vital pipelines and sea routes used in the global crude trade is cause for concern. The nation sits very close to three of the most important crude transport routes in the world.

To the southwest sits Egypt and the Suez Canal, a vital route connecting the Red Sea to the Mediterranean Sea. The canal transports nearly 800,000 barrels of crude and 1.4 million barrels of petroleum products each day.

The Suez-Mediterranean pipeline (typically known as the Sumed) is another vital shipping route in nearby Egypt. According to the Energy Information Association, the pipeline pumps 1.7 million barrels of crude oil each day.

Any disruption to either of these trade routes would have serious consequences to the global energy trade.

Syria’s proximity to Iraq and Turkey is also problematic for the largest oil trade route to its north. Pipelines in the region have been the victim of sabotage, and Syrian conflict could accelerate increases in this behavior. The Kirkuk-Ceyhan pipeline in Turkey carries a massive supply of oil from Iraq to the Mediterranean.

Any disruptions would have an immediate impact on prices.

Some analysts, such as Societe Generale’s Michael Wittner, believe that oil prices could spike as high as $150 a barrel if the conflict became significant. That would set a new record from Brent’s all-time high of $145.60.

With tensions heating up, rising oil and gas prices could be detrimental to the U.S. economy as September approaches.

The markets have been concerned about the U.S. Federal Reserve tapering its quantitative easing (QE) program next month, which has driven concerns about an economic downturn and market correction. Now rising oil prices will hurt consumers, who will pay higher prices at the pump while cutting back spending elsewhere.

While oil traders will likely continue to keep their eyes on trade through Egypt’s canal and pipeline, Americans will be more likely to keep their eyes on prices at the pump.

This week, the average price of gas in the United States sits at $3.57 a gallon. Any conflict or disruptions in supply output could drive prices higher.

Money MorningWritten By Garrett Baldwin From Money Morning

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