Oil Speculation and Syria: A Microstudy


There is nothing more irritating than an economist looking at you skeptically when you talk about speculation in certain markets and saying: “go on then, cook up a study and prove it is taking place”. What they mean is that you should work your ass off producing a largely meaningless and irrelevant econometric study that they will be able to dispute by messing with lags and filters until they get a result contrary to your own. Meanwhile, everyone in the markets knows that speculation is taking place. Why? Because its so intuitively obvious to anyone who follows these markets.

A good example of this is the recent rally in the oil markets on the back of the announcement of the US probably intervening in some way in the Syrian conflict. I have provided more long-term evidence on this blog before that such speculation is taking place, but now we have a good solid concrete event with which to show why it is so obvious to market participants what is going on and why econometric studies cannot capture such intuitions.

In an article misleadingly entitled Why Small Producer Syria Matters to Oil Markets Reuters lay out a number of facts about the Syrian oil market. I will here provide only the ones I think most important:

– Syria has not exported any oil since late 2011, when international sanctions came into force.

– “Syria is not a major oil producer (as was Libya), nor is it a major transit point for oil and gas exports (as is Egypt),” said Julian Jessop, head of commodities research at Capital Economics.

– Syria’s current production is estimated at just 50,000 bpd, all of which is refined domestically.

Pretty small time player, right? And they haven’t been exporting for two years. Also consider the fact that the country has been in civil war for months now; are US airstrikes or something similar really going to have that much of an effect on oil production and consumption? Doubtful.

But the effects that the news are having on market sentiment are enormous. Via the FT:

Some argue it has further to go. Société Générale analysts say Brent is likely to reach $125 a barrel if the west does launch airstrikes, and could touch $150 a barrel if such strikes disrupt production.
Such hysteria is all too familiar to anyone who follows financial markets. But the strangest thing is that its not as if I or any other skeptic have a monopoly on the facts in this case. Nor are these facts not widely known. At the very beginning of the above article the FT journalist writes:
By Middle Eastern standards the Syrian oil industry is a tiddler.
Indeed. Add in the fact that they haven’t been exporting since 2011 and that they’ve already been in civil war for months and there seems very little tangible reason for the recent price rises. Most analysts and market bulls are putting it down to the idea that the US intervention will escalate tensions in the Middle East. That might be true, but it is completely unclear why this would translate into an immediate shortfall of oil supply. Rather this is a projection of a general sense of fear onto the region and people are making their purchases accordingly.
This is just speculation pure and simple and the level of sophistication is not far off making a decision based on what a fortune-teller has read on your palm at a funfair. There’s a bit of anxiety in the markets and speculators are looking to pick up on that anxiety. They’re looking at those around them and mimicking what they’re doing. When the headlines disappear the market will subside. The bulls will pull out and look elsewhere for a quick buck and the bears will pile in. This is how financial markets really work and you don’t need any econometric studies to tell you this; indeed, they tend to impede our understanding by distracting from the truth of the matter.

About pilkingtonphil

Philip Pilkington is a macroeconomist and investment professional. Writing about all things macro and investment. Views my own.You can follow him on Twitter at @philippilk.
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3 Responses to Oil Speculation and Syria: A Microstudy

  1. Very interesting connection. Its pretty much a gut reaction for people to bid up the price of oil whenever there is violence in the Middle East, thanks for pointing out this is speculation unrelated to any economic fundamentals.

  2. Stefan says:

    I agree that there is speculation in the oil futures market. It is not a bad thing and it is by no means a hidden or an esoteric thing – there is hundreds of hedge funds making a living only on commodity speculation (ever heard of CTAs?) that is not related to supply/demand in the economy.
    In the Syria case, I see the market scared for a good reason – what if Strait of Hormuz is closed in a retaliation from Iran? Oil will surely spike! What if the war is prolonged and OPEC countries are pressured to produce more oil to finance military spending? What will happen to prices then?
    Also, did you consider that we might have other factors at play at the same time. For example, when Saudi king dies, and if there is no successor, as there is none at the moment, oil is going to suffer extreme volatility.

    • Yup. That illustrates the speculative mindset pretty well alright.

      “What if… what if…” and so on. It’s all so uncertain and subjective. But that’s the nature of speculation. That, and to make money, of course… lot’s of money.

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