We’re getting close and closer to a bottom in oil prices.
The price of crude oil is in a free-fall, trading at just over $33.00 per barrel during the last week of January. Most analysts have given up, calling for crude to fall as low as $10.00 by year-end. However, they may have overlooked the one thing that could put a bottom in under oil prices: the Syrian peace talks.
Let me explain…
Nobody expects the Syrian civil war to be over because of the talks. Many of the Islamist rebels and the Kurds are not attending. But if the major powers can come to even a small truce, Russia and Saudi Arabia could also agree to cut oil output.
Russia and Saudi Arabia hold the key to understanding where oil prices will go in this context. For now, Russia has no plans to talk to either OPEC or Saudi Arabia to discuss the oil market. No one even knows if Russia will send a representative to the OPEC summit in February.
In January 2016, Brent prices reached the lowest level in 12 years. They started to rise, fueled by talks between Russia, OPEC, and Saudi Arabia, yet the cartel remains divided. Saudi Arabia has taken a dominant lead. It has refused to lower production quotas—the only thing that could put a bottom under oil prices.
The United States, Russia and more than a dozen other nations have agreed on a ceasefire in Syria following marathon talks in Munich. Alessandro Bruno, analyst with Profit Confidential joined CTV News Channel with his analysis.
Posted by CTV News Channel on Friday, 12 February 2016
Oil production in Russia in 2015 reached a record for the post-Soviet period. It hit as much as 10.7 million barrels a day on average. Therefore, the Russians are eager to talk to the Saudis. But they must first agree on at least some key issues on Syria despite having conflicting interests. (Source: “Russian Oil and Condensate Production Hits Post-Soviet Record,” Rigzone, July 14, 2015.)
The Saudis also perceive the current rehabilitation of Iran with fear. They are especially reluctant to give their Persian Gulf neighbor any more advantages in the form of an oil price lifting production cut. Yet, the Saudis cannot afford to allow pride to win the day.
The energy market and the decline in oil prices are putting pressure on the Saudi monarchy. In contrast, Iran is stable, thanks to the end of sanctions and access to world markets. President Rouhani has taken immediate advantage of Iran’s post-sanctions reality. He visited Italy and France and signed multibillion-dollar deals, showing off his country’s new diplomatic value.
Despite concerns about Iran’s human rights record (Saudi Arabia’s violations are far worse), the country is returning as a key player in the Middle East. Neither Saudi Arabia nor the United States can ignore this fact. As for Syria and the peace talks, the international community’s intervention has been ineffective at best. In fact, it may have worsened the conflict and prevented any kind of resolution.
Special interests are a roadblock to peace. The positions of Russia and the United States about the future of Syria are still far apart, despite repeated calls for cooperation. Still, should they find one point in common, the Geneva talks could lead to a more stable oil market. Indeed, they might reverse the bearish trend toward $20.00—or even $10.00—oil, as some analysts predict, but they will produce little by way of relief for the Syrian people.
The European Union could also affect oil prices. The flow of Syrian refugees has given strength to many right-wing groups. They could exploit the situation, some fear, by predicting economic collapse.
The risks related to the huge flow of refugees from Syria and beyond has raised many security issues. The higher security risks have, in turn, raised fears of recession and put pressure on the euro. The European Central Bank (ECB) continues to ease monetary policy to stimulate economic growth. But this betrays fears of economic weakness and implies lower demand for oil.
Low economic growth in the EU also means less demand for goods from China. Its export-dominated economy has started to show signs of weakness itself—also not good for oil prices.
In 2015, more than one million people have been knocking at Europe’s door. In response, EU countries have started to question fundamental pillars of the Union, such as the Schengen Agreement. This has guaranteed open borders between member states for more than 20 years.
Peace in Syria is unlikely, but diplomacy—and an oil price hike—has a chance.
There are few who believe in the success of the peace negotiations for Syria. The Saudi-backed Islamist opposition has refused to attend. Turkey has refused to invite the Syrian Kurds, even if they have led the fight against the Islamic State.
There are hundreds of warring factions in Syria. The main difference between them is how they fight for survival and their own interests. Often, there is no distinction.
More often, they have shown to care little for the interests of the innocent population at large. As in most civil wars, the parties involved in the fighting are the only “winners.” They don’t call them warlords by accident.
Indeed, the chances of a major agreement over Syria are lower than Lebanon in the 1980s or Afghanistan in the 90s (and now) or even Iraq. Syria is a quagmire. But unlike the other cases, the country has a resilient government (Bashar al-Assad) and major allies like Russia and Iran. They are fighting a multitude of opposing groups. Many of these hold Islamist ideologies, backed by foreign fighters who fill the ranks of al-Qaida or ISIS. Saudi Arabia and Turkey have assisted some of these groups.
The faint chance of solution needs an agreement between Washington and Moscow. This is elusive, given the odd relationship of cooperation and competition that exists between Putin and Obama. Russians and Americans help Syrian Kurds with air strikes against the Islamic State. But Moscow demands that the al-Assad government must remain. The U.S., meanwhile, has supported the mostly Sunni radical opposition with Saudi Arabia and Turkey.
How Much Can Brent Oil Prices Rise?
What are the chances of a diplomatic solution?
To suggest the cliché one-in-a-million would be optimistic. Still, the parties at the Geneva talks just need to find the tiniest of opportunities. Should they manage to hold civil discussion, the major powers could even send oil prices higher.
A bullish oil price scenario is also likely. Saudi Arabia’s increased output cannot last much longer. Iran’s importance in the Middle East and the support for its allies have forced Saudi Arabia to accept the Russian-Iranian axis. This means more pressure to cut output.
The Saudis will also breathe a sigh of relief. They have flooded the oil market to keep prices low, constraining the Kingdom’s budget. This has compromised large welfare measures that help ensure stability in the country at risk. OPEC members will follow suit, resulting in a bullish Brent oil price forecast in 2016.
Lower production will affect the rising price of Brent crude oil. Yet, President Putin will likely not create a diplomatic and military strategy for just a small bump. He expects oil to return to prices that accommodate Russian budgetary constraints. This means upwards of $80.00 per barrel. (Source: “Russian engagement in Syria is Putin’s ultimate power play,” The Hill, October 27, 2015.)
By intervening, Russia wants more control in Syria. While Russian weapons have made a lot of noise, Russian diplomacy has pursued a new relationship with the Saudis. After an extended period of hostility, the Saudis themselves have found it necessary to work with Moscow.
That could send oil prices soaring.