Despite Syria’s minor role in the global oil trade (the nation produces less than 1% of global supply), U.S. threats of intervention have created uncertainty, sending oil prices higher. The fear is based on the idea that a U.S. strike will create a domino effect over the entire region. These worries have added an “uncertainty premium” to the price of oil and been exacerbated with Russian opposition to a U.S. military strike.
Negotiations between the U.S. and Russia are underway for Syria to turn over control of its chemical weapons to international oversight. As of this writing, the Syrian rebel forces have rejected the proposal, but President Bashar Assad has agreed to the offer in an effort to avoid U.S. intervention. Oil traders are anxiously awaiting the outcome of these efforts at a diplomatic resolution.
If a U.S. strike is averted though diplomatic means, we can expect a drop in oil prices as the “uncertainty premium” in the oil market will have been removed. At the same time, a U.S. strike would likely result in a drop in oil prices. In my view, the fear of the domino effect is overblown.
Risks to Consider: Although I am convinced that oil prices will drop as soon as the current U.S.-Syria impasse is resolved, I don’t think it matters to oil prices whether the solution is diplomatic or small-scale military strike. However, there is the potential for the U.S. to be overly heavy-handed and possibly getting other countries involved. Should the conflict expand beyond Syria’s borders, the continued uncertainty will result in climbing oil prices. Be sure to use stops and position size properly when investing.
Action To Take –> I think there will be a resolution to the Syrian issue very soon. This resolution will remove the “uncertainty premium” in oil prices, meaning it’s time to short oil. I like the United States Oil Fund LP (ETF) (NYSEARCA:USO) as a short right now. Shorting between its current price and $40 with stops at $40.75 and a 12-month target price of $33 makes solid sense.
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– David Goodboy
The article What The Syrian Crisis Means For Oil Prices originally appeared on StreetAuthority and is written by David Goodboy.
David Goodboy does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.