$100 Oil? This Could Cause a Super-Spike in Oil Prices

Oil-Price-Forecast-for-2016Oil Price Forecast: This Could Send Oil Prices to $100

Oil prices are rising on the commodities market in response to tensions between the United States and Russia over Syria. The WTI gained 2.4% to hit $46.25 a barrel while Brent rose 2.5%, returning to over $49.39.

The United States is bracing itself for hurricane season and cyclone Joaquin is not disappointing expectations, having been “promoted” to a category-3 storm and gaining strength. However, Moscow’s decision to intervene in Syria by bombarding Islamic State (IS) positions is the more likely reason to account for oil’s higher price.

In fact, U.S.-Russia tensions can only go up as President Putin is determined to prevent Islamic militants, IS or any other stripe, from expanding into the volatile Caucasus region. While the White House has expressed its concerns, noted GOP Senator John McCain has accused Russia of targeting Syrian rebels trained and financed by the CIA to fight Islamic State rather than the latter group’s jihadists themselves.

Many in the American media have accused Putin of acting irrationally recently. Indeed, there is nothing especially rational about dropping bombs to solve a problem begging for an alternative solution. Nevertheless, Putin has made his calculations and raising the price of oil very important to Russia. The country is one of the world’s largest producers and exporters in addition to being one of his main targets. There is nothing irrational about that.

Putin has also calculated the timing properly. The West’s strategy in the region has shown its defects all too well. President Obama has now started the last phase of his presidency and would like to end it with a deal on Syria. Putin is relying on it. However, the Russian and American presidents’ position over the fate of Asad are too distant. Moscow considers the Syrian president as a necessary element of a political transition while Washington wants him out.

Putin Wants Oil Around $90.00-$100.00 Per Barrel

Putin is well aware of this and he wants to exploit it for Russia’s benefit at a time when the country is not experiencing a good economic moment. Launching attacks in Syria, backing Asad in opposition to U.S. plans, will produce one of two things; both useful to boosting the price of oil and hence the Russian economy. By confronting U.S. policy in the Middle East, Russia is raising bilateral tensions to a level approaching what was experienced during the Cuban missile crisis.

Oil responds to political risk like other factors, especially when the Middle East is at the root of that risk. Indeed, there is the impression that, despite his shrewdness, Putin is taking risks much greater than those he has been managing in Ukraine.

Alternatively, Putin is also gambling on the fact that should his more comprehensive bombing campaign in Syria be successful in defeating Islamic State, the West will eventually appreciate the efforts and come to some understanding with Moscow. In the latter scenario, Putin will be able to use the goodwill to persuade Americans and Saudis to adopt measures to help increase the price of oil—by reducing production for example.

Light Crude Oil - Spot Price Chart

Chart courtesy of www.StockCharts.com

In other words, Putin’s direct involvement in Syria is effectively a tool to boost oil prices. The fact that Putin is acting in conjunction with Iran, which wants to see higher oil prices in order to take advantage of the lifting of sanctions to spend on improving infrastructure and social programs, adds further emphasis to this point. Iran plans to increase its oil exports to 500,000 barrels per day in late November and early December and one million barrels a day by mid-2016, according to TheWall Street Journal. (U.S. Oil output finally falls but it isn’t helping oil prices, Wall Street Journal, Sep. 28, 2015.)

Before 2012, Iran’s oil exports accounted for half the revenues and one-fifth of the country’s gross domestic product (GDP). Since then, Iran has lost $160 billion in oil revenues, according to an estimate by Jack Lew, Secretary of the U.S. Treasury. The sanctions against Iran will be lifted gradually over the coming months. However, despite the reopening of exports, the country may face many difficulties unless oil prices increase from historic lows.

According to the International Monetary Fund (IMF), the “break-even point” for Iranian oil—that is, the price per barrel needed to balance the budget—is $ 92.50. (Source: Here are the break-even points for 13 of the world’s major oil producers, Business Insider, July 20, 2015.)

At that price, Russia’s oil industry and government will also be happy. Therefore, by entering Syria, Putin is really aiming to boost oil back into the $90.00-$100.00 range—more than double current prices. Until recently, the Saudis have reiterated their production strategy, but some of its allies like the U.A.E. and Egypt are also hurting from low oil. Putin’s move may just work in persuading the Kingdom to shift.

McCain Accuses Russia of Targeting American-Backed Rebels

During an interview with CNN, Sen. McCain accused the Kremlin, noting “I can absolutely confirm that these strikes have hit the Free Syrian Army or groups who were armed and trained by the CIA,” rather than Islamic State as the Russians have claimed. (Source: Russia targeting U.S. backed groups in Syria, Sen. John McCain says, Toronto Star, Oct. 1, 2015.)

U.S. Secretary of Defense Ashton Carter has also said that Russian air raids had targeted areas where there were “probably” no IS fighters.

John McCain, who claims to rely on sources present on site, believes that Moscow is playing a double game in Syria in order to “keep Asad’s murderous regime in power,” by targeting what the hawkish senator considers as the legitimate opposition. McCain did not spare the Obama administration, lambasting it for creating “confusion among our friends and encouraged our enemies,” thundered the Senator, lambasting the “perils of inaction” of America in the Middle East.

Grandstanding or not, McCain’s criticism has highlighted the fact that the United States has been caught short by Vladimir Putin’s decisiveness in Syria. The State Department did condemn Moscow at first, while also noting that it would not change the international coalition it has led, which has been bombarding Islamic State for over a year in Syria and Iraq.

The Russian advance has resurrected Asad’s chances of remaining in power. This is the spark that could raise tensions throughout the region, translating into a potential doubling of oil prices. The Syrian leader has not wasted time. Asad is preparing to launch a ground operation to retake rebel-held Syria, benefiting from the support of the Russian raids.

Iran Sends Troops and Prepares for Ground Offensive

Lebanese sources, as reported by Reuters, claim that hundreds of Iranian soldiers and officers have arrived in Syria to join the government and the Hezbollah militia to fight not just Islamic State but the various rebel groups as a whole—including some U.S.-backed groups, as Sen. McCain noted.

Meanwhile, the Russian ministry of defense in Moscow has confirmed that its air force has led several raids against “terrorists” in Syria, destroying such targets as an ammunition depot near Idlib, a control point near Hama, and an explosives factory north of Homs.

In other words, if necessary, Putin has all the authority he needs to send ground troops to Syria. Regardless of technical price factors, oil can only go up in such a scenario. Russia has been involved in wars since the collapse of the Soviet Union, but all of them have been within or just outside its borders, intervening on behalf of Russian communities living in former Soviet republics from Georgia to Ukraine.

By launching air raids in Syria, backing Asad, as well as being in alignment with the interests of Iran, Russia is challenging the United States in the wider geopolitical context. At a regional level, it’s challenging Turkey and Saudi Arabia. The latter powers have backed some of the rebels, who, according to Sen. McCain, have been on the receiving end of Russia’s recent raids.

Russian aircraft hit areas like the town of Jisr al-Shughour, backed by Turkey and Saudi Arabia. For their part, the Saudis have accused the Russians of having left victims among the civilian population.

As reported by The New York Times and Washington Post, at least one of the positions of Syrian rebels bombed by the Russians contained a group of CIA-trained rebels.Specifically, Putin said that the Russian raids in Syrian skies are hitting “a well-known list of terrorist organizations,” stressing that the targets are chosen together with the Syrian armed forces.

Putin defended his stance noting that the Russian campaign in Syria has been coordinated with U.S. intelligence and the Pentagon. Tehran, meanwhile, has officially expressed its support for Russian military intervention in Syria against the jihadists, challenging Saudi Arabia’s efforts to gain hegemony in the region.

The situation in Syria has become more delicate as both the United States and Russia have become directly involved in its civil war. This involvement is on different sides however, pursuing different outcomes. Russia wants to see Asad remain in power while the United States continues to see the Syrian president as the main obstacle to peace.

U.S. Secretary of State John Kerry stressed that it was “imperative” to find a solution to avoid an escalation, but Putin is determined. It’s difficult to see how Washington can stop him now. Saudi Arabia has already expressed “deep concern” over the Russian raids in Syria, demanding that they be interrupted—though he did not offer alternatives or methods to stop them.

Russia Preparing for a Long Fight

Rather than backing down, Moscow is strengthening its military presence in Syria, with details that seem to indicate a short-term intervention. The Russian Northern Fleet has been moving from the Black Sea and the Baltic to help the supply of air forces engaged in Syria. This includes more than 50 aircraft and helicopters.

Meanwhile, Iranian soldiers are also ready for a ground offensive. Hundreds of Iranian soldiers arrived in Syria to launch attacks against rebels in northern Syria to be joined by Hezbollah allies from Lebanon. They will take advantage of Russian air cover to deploy a land-based army to regain the territories occupied by the rebels.

There is the risk that Saudi Arabia, with or without American support, will challenge the Syrian-Iranian land army because it fears the rise of a powerful Shiite political-military alliance in the region. The situation may unfold rather as it did in Yemen last spring. However, in this case, contact between the rival powers and interests will be more direct and more intense.

In such a scenario, oil cannot but increase as the implications extend beyond Syrian borders, potentially forcing the United States to become more rather than less involved.

Separately, oil prices are also being sustained because the Chinese manufacturing, even as it stayed in negative territory, rose higher than expected.

Read More: