FYI | Aug 31 2013
By Kathleen Brooks, Research Director UK EMEA FOREX.com
The rejection of the UK government’s motion to use force against Syria in a late-night vote on Thursday has dramatically reduced the chance of an airstrike against Syria. This should be good news for risky assets like stocks and bad news for oil, right? Not quite. Stocks have given back earlier gains and both UK (Brent) and US (WTI) oil have strengthened during the first half of the European session.
One of the reasons could be that unilateral action against Syria from the US is still on the cards, which could limit downside in the short term for the oil price. While Syria is not an oil producer, the concern is that the crisis could spill over to the rest of the region, where they do produce oil. In an extreme scenario, which we deem to be extremely unlikely, if the US does attack Syria it may face the wrath of Russia who may defend Assad in the event of an attack.
The technical outlook for Brent oil:
When the geopolitical risks remain uncertain, the best thing to do is to turn to price action. Overall, Brent looks like it is consolidating in a fairly tight range today between $114.00 – $116.00. In the very short term, above $114.65 – the daily pivot – is mildly bullish. $117.35 is the high from last week, when tensions peaked. In the absence of a major driver/ US Syria strike, it’s hard to see oil pushing higher in the short term, and instead dips may be limited to the $114 region.
The oil price after Syria:
If Syrian airstrike fears recede permanently there are some fundamental risks that could weigh on the price of oil in the coming weeks:
– Fed tapering – strong payrolls next week could bring the focus back to the Fed; tapering tends to be bad news for commodity prices.
– USD: expectations for a stronger dollar persist, since oil is priced in dollars, a stronger greenback can weigh on the oil price.
Takeaway: the oil price is much less volatile today as the market holds its breath waiting to hear if the US will strike Syria. There could be further upside towards $120 in Brent crude oil if the US does attack Syria, however, if Syrian risks recede then we could see Brent drift back to its pre-Syria range between $108.20 (a cluster of daily moving average support) – $112.00 (high from August 15th).
Figure 1:
Source: FOREX.com and Bloomberg (Prices displayed on the chart might not reflect Forex.com prices)
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