Embargo on Syrian crude could have impact on prices
2011-09-02 12:04:50
In a tight market, each and every barrel counts. Syria is not nearly as important to the oil industry as Libya, yet the imminent European Union embargo on its oil exports could still have a meaningful impact in supporting prices.
Brussels is close to agreeing on a ban on Syrian crude as the EU steps up its pressure over Damascus, diplomats and traders say.
Oil exports are an economic lifeline for the regime of Bashar al-Assad, which has launched a bloody crackdown against pro-democracy activists since the beginning of the year.
The export losses would not create a problem under ordinary circumstances. But after months of unrest in the energy-rich Middle East and north Africa region, the oil market is anything but normal.
In particular, the refiners of the Mediterranean basin, which include some of the world’s largest oil importing nations, such as France, Spain and Italy, had been short of supplies since the start of the war in Libya in February. Oil inventories in the region have fallen sharply as a result.
“Every loss is significant in a tight market,” says Bassam Fattouh, head of the oil markets and Middle East programme at the Oxford Centre for Energy Studies.
Syria pumps about 370,000 barrels a day and exports nearly 150,000 b/d, most of it to Europe, according to estimates by the International Energy Agency.
That is far less than the 1.6m b/d that Libya produced before the start of the civil war.
But Lawrence Eagles, head of oil research at JPMorgan in New York, believes that the oil embargo against Syria would be enough to “further constrain supply options for European refiners, particularly in the Mediterranean region”.
Italy, France and Spain bought nearly half the oil that Syria exported last year.
Rome is already stalling on the sanctions, trying to delay them until November, when seasonal refinery maintenance in the Mediterranean would reduce demand
The price of Brent crude, the European benchmark, has already risen towards $115 a barrel, recovering after losses triggered by the fall of Tripoli last month.
Yet the impact of the embargo would be far smaller than the effect of the loss of Libyan crude, which pushed Brent prices to a two-and-a-half-year high of $127.02 in April.
Not only does Syria produce less oil, its quality is also much lower. While Libyan crude is sought after by refiners because of its low thickness and sulphur content, which makes it ideal to meet strict environmental regulations for gasoline and diesel in Europe, Syrian oil is highly viscous and contains large amounts of sulphur.
The latter’s main export oil stream, accounting for about three-quarters of sales, is known as Souedie crude and contains 4.20 per cent of sulphur. Libya’s main export grade, known as Es Sider, only contains 0.44 per cent of sulphur.
Other countries in the region, which struggled to replace the losses of Libyan oil as they lacked crude of similar high quality, could easily replace the losses from Syria.
Saudi Arabia, Kuwait and the United Arab Emirates, all opposed to the al-Assad regime, have oil streams that perfectly match the quality of Souedie.
Another factor could dampen the price impact of the oil embargo: the export ban only applies to European countries.
Thus Syria could, over time, re-route the sales to friendly nations such as China and India. Damascus would probably have to discount its oil to entice lifters but traders have little doubt that the oil would flow again.
Beyond the effect on physical oil markets, the psychological impact could prove more important, analysts say.
The embargo would be a powerful reminder of the geopolitical challenges that the oil market faces as a consequence of the Arab Spring. Besides Libya and Syria, the unrest in Yemen could cut oil supplies too.
“I don’t think the oil market needs a reminder of the trouble in the Middle East and north Africa region, but it [the embargo] does underscore that the region is going to be a source of instability for years to come,” says Michael Wittner, head of commodities research at Société Générale in New York.