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The summer of discontent in the Arab world is keeping some oil traders on the edge.
Crude oil prices have yet to react to renewed unrest in Syria – and the growing threat that Europe and the US impose oil sanctions against the regime of regime of Bashar al-Assad. But geopolitical events could turn to the worse anytime, disrupting oil output.
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The start of the Muslim month of Ramadan this week has exacerbated the unrest in the energy-rich Middle East region. As one Syrian pro-democracy activist says, in reference to the demonstrations that usually follow the prayers: “Every day will be a Friday”.
The focal point is Syria as protests have spread from the centre of the country to the eastern oil-producing town of Deir Ezzor. Syria is a small oil producer, but a tight markets means that each and every barrels count. According to the International Energy Agency, the western countries’ oil watchdog, Syria would pump on average this year about 370,000 barrels a day, compared to about 1.6m b/d for Libya.
The threat to oil production is double. On the one hand, activists could target the lightly-guarded network of pipelines, disrupting exports. Oil workers could strike too. Two weeks ago, the prospect of either sabotage or strikes was small. But with the unrest now engulfing the east region close to the Iraqi border, the situation has changed. On the other hand, the voices for an oil embargo against Syria’s regime are growing.
Europe buys the bulk of the 150,000 b/d of oil that Syria sells overseas, so its view of sanctions would be key. So far, the continent appears to be reluctant to act. But some prominent politicians are raising the flag of sanctions. Guy Verhofstadt, the leader of the liberals in the European Parliament, called this week to include to blacklist the country’s two state-owned oil companies Syria Petroleum Corporation (SPC) and Sytrol. The objective is to deprive the regime of cash – about $15m per day at current prices.
“We need to hit as hard as possible on the regime’s source of finance,” Mr Verhofstadt said in a statement. “Among the new targets to sanction, the EU should also include Syrian businesses, accomplices of financing the repression, like oil companies.”
Within Europe, Germany, France and Italy buy much of the Syrian oil. The country sells two main grades: low quality, high sulphur Souedie – also known as Syrian Heavy, its main export grade – and the high quality, low sulphur Syrian Light. It is different from most of the high quality, low sulphur oil from Libya, in that other countries in the region could easily replace the losses from Syria. For example, Saudi Arabia, Kuwait and the United Arab Emirates have crude streams that match perfectly the quality of Souedie. Unilateral sanctions (bypassing the Security Council of the UN) could prove effective as Syria would have a hard time selling its low quality Souedie crude outside Western countries as it requires sophisticated refiners to upgrade it into fuels.
While the geopolitical focus remains in Syria, some traders are keeping at watchful eye on several bigger producers – Iran, Iraq and South Sudan – and smaller producer Yemen. All could turn this month a relaxed oil market into chaos without warning.
