Oil and Gas

If oil hits $80, there's a lot more at play than airstrikes in Syria

Key Points
  • Iran and Russia's reactions to the Syria strikes, and whether the White House re-imposes sanctions on Iran, will determine oil's future.
  • Energy strategists told CNBC over the weekend they expected oil to see little upside momentum from the strikes.
A methanol plant and oil wells on Kharg Island in the Persian Gulf, off the coast of Iran
Kaveh Kazemi | Getty Images

Saturday's U.S.-led airstrikes on are likely to draw only a muted response in oil markets.

Instead, it will be how Syrian President Iranian and Russian allies react, and whether the White House pulls out of the Iran nuclear deal and re-imposes sanctions on the OPEC producer that will determine any move toward $80.

Syria produces only negligible volumes of oil, but benchmark oil prices rose to their highest since 2014 in the build-up to military action reflecting fears of broader regional instability. Though it's unclear if the strategic aim of the airstrikes — to degrade Syria's chemical weapons stockpiles — has been achieved, the action is perceived as a single strike and unlikely at this stage to provoke an outright confrontation between Assad allies and with the West in Syria.

"I think the market will be quite relaxed about the strikes, which were more limited than they might have been, and have found little response from the Assad regime or Russia," said Robin Mills, CEO of Qamar Energy, and a former Shell executive. "It's already been pretty clearly telegraphed that the U.S. will withdraw from the Iran deal, but the big question is what it then tries to do. I do think it's worth watching further sanctions on Russia. The tighter market now is certainly more vulnerable to geopolitical concerns or real disruptions."

What’s next for oil?
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What’s next for oil?

Energy strategists told CNBC over the weekend they expected oil to see little upside momentum from the strikes.

"I would not be surprised to see the oil price sliding given the fact that it has been priced in already," said Eugen Weinberg, head of commodity research at Commerzbank, told CNBC on Sunday.

As predicted, Brent crude and U.S. oil futures traded at $72.32 a barrel and $67.17 at around 7.50 a.m. Singapore time, down by 0.36 percent and 0.33 percent.

"Crude has outperformed most expectations for this time of year and may have rallied too far too fast ... there is no doubt that geopolitics has factored prominently in the rally of the last week," said Amrita Sen, chief oil analyst at Energy Aspects. "But we are likely to get a sell-off this week as the extent of the Syrian strikes have been muted and, in general, calmer nerves prevail in Washington."

That said, strategists didn't rule out a move toward $80 per barrel in the near term. U.S.-led airstrikes will likely worsen already tense relations between Washington and Tehran ahead of President May 12 deadline to renew or suspend sanctions waivers under the 2015 Iran nuclear deal.

The majority of the 10 strategists contacted by CNBC assigned a high-probability to Trump re-imposing sanctions on Iran.

The likelihood of the Trump administration withdrawing from the nuclear deal "is 90 percent," said Fereidun Fesharaki, chairman of energy consultancy Facts Global Energy and a former energy adviser to the prime minister of Iran in the 1970s. That in turn would risk "triggering sanctions within 180 days, but markets have not priced it in."

Even in the absence of such supply-related geopolitical tensions, "$80 oil is coming ... within the next couple of months," added Fesharaki. "Saudis are aiming for it. Iran and Venezuela sanctions add to the pressure. This may mean OPEC had to moderate the production cuts."

Commerzbank's Weinberg added: "I do expect the U.S. sanctions against Iran being re-established. It's widely expected but probably not to 100 percent. The reaction to such news would depend on the conditions and whether the other countries would join them (in sanctions) and the response of the OPEC. We may expect Saudi Arabia compensating for the eventual shortfalls."

The Syrian action "signals the arrival of the new hardliners in the Trump administration and their willingness to actively engage Russia, Iran and the Assad regime," said John Driscoll, director at JTD Energy Services. He said there's a "good chance we will breach $75 Brent shortly and hit new multi-year highs."