By Brook, James
14/10/2013 17:12:24

Oil Market Report: September 2013

At the beginning of September, prices did indeed start to go a little crazy, although all but the most hardened of market cynics, would surely accept that this was a result of the escalating crisis in Syria, rather than the City returning to work.

But why should a crisis in Syria stimulate such volatility? Why should such a minnow in terms of oil production have such a profound impact on world oil prices? Here is a country that prior to the Civil War was only producing 380,000 barrels per day - a 12th of BP’s world oil production and a volume that puts the country in about 30th place in the world production ranks. More significantly, the country has been producing virtually nothing for the last 18 months anyway (in industry terms, its oil production is “shut-in”), so if we are to believe (as analysts tell us we should) that oil prices are a function of supply and demand, then the crisis should have no impact at all, in that supply remains unaffected (and demand consistent).

However, on the other side of the argument, we have the oil price “hawks” who would point out that any crisis in the Middle East will always affect oil prices. They will also remind us that it is the fear of future oil shortages that invariably has as much impact on prices, as the actual shortages themselves and the situation in Syria reflects this. After all, any conflict would likely pit Saudi Arabia and the USA against Syria’s main allies, Iran and Russia. That is to say, a potential war between the two biggest oil producers in the world, backed on each side by the two largest nuclear super-powers in the world. Seems a fairly good cause for concern to us! And even if we took the best-case scenario (where military action is avoided), we possibly still face years of oil embargoes, sanctions and supply-chain disruptions - none of which typically do much for oil price stability.

If we were to marry both of these standpoints together, then the result would look very much like September 2013 in that oil prices did move significantly, but also proportionately to the scale of the factors involved. The attached graph shows prices going back to 2003 and we can see that September 2013 only ranks as the 25th most price volatile month* over the last 10 years. Other incidents (months) such as the Credit Crunch, the Iraq War and Hurricane Katrina all had a more profound effect on prices than recent developments in Syria and on balance this seems about right, considering the global ramifications of each of those events, as they were perceived at the time.

Therefore, September 2013 should be viewed as a significant but not extra-ordinary month in terms of oil price volatility - certainly any future military action in Syria involving foreign powers, would soon dwarf anything we have experienced over the last 30 days. But more interesting is what September 2013 tells us about the oil market and that in the main, “the market does not lie”. Yes - at the beginning of the month - we did have price speculation and this sent prices shooting up, as fear of the unknown became paramount. But then reality kicked in and the market rightly concluded that a country that produces and consumes virtually nothing (ie, Syria), can only have so much impact on the world’s oil price. We then had a receding of the military threat, such that prices first stabilised and subsequently retracted back to pre-September levels. Controversial as it may sound, this shows an oil market that is functioning properly, promptly and proportionately to relevant events and not quite the speculative, plaything of banks and oil companies, as is sometimes portrayed online and in the media.

* this rank would be lower still if we calculated volatility as a percentage of the total value of oil, rather than the graph, which looks at absolute values.

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