LONDON (Reuters Breakingviews) - Crude oil prices spiked after U.S. missiles rained down on Syria. The fear isn't that military intervention could disrupt supplies but that Iran, which has been boosting output, will retaliate. Even if that scenario unfolds, though, the market's response looks excessive.
Brent futures briefly touched a one-month high of above $56 per barrel after the attacks launched in the early hours of Friday. At first blush, it seems logical that tension in the Middle East would drive up the risk of a major export disruption from the region. Yet Damascus is far from major supply routes. The Bashar al-Assad regime has little direct impact on the world economy.
It is al-Assad's ally Iran that's the real worry. Increasing oil supplies from the Islamic Republic since international sanctions were lifted last year have helped to keep prices below their 10-year moving average of over $73 per barrel. Iran's output has climbed 30 percent to near 3.8 million barrels per day of oil. It has been exempted, too, from all the cuts agreed by the Organization of the Petroleum Exporting Countries in November.
Assume Iran, which holds presidential elections in May, feels obliged to back al-Assad. That could provide U.S. President Donald Trump with an excuse to back out of the nuclear accord which came into force with world powers last year. The theoretical result: a block on exports, restrictions on international companies exploring for Iranian oil, and higher prices.
In reality things could be different. First, sanctions on Iran may not deter its largest markets in China, India, South Korea and Japan from importing Iranian crude anyway - particularly if they are uneasy about unilateral U.S. military moves. Secondly, shortfalls could also be made up by Saudi Arabia, whose spare capacity alone is half Iran's total output. Saudi wants higher prices, but it also targets stable markets.
Of course, Iran could cause problems in the Gulf by cutting off the strategic Strait of Hormuz, through which one-third of all seaborne oil passes. Then, the risk premium in oil really would increase. But the narrow waterway is heavily defended; a so-called tanker war hasn't been seen since Iran and Iraq traded blows in the 1980s. Tensions in the Middle East are rising, but that doesn't mean the oil price has to.