Oil prices have hit their highest since late 2014 and JP Morgan says Brent crude could go to $US80 a barrel as US-led strikes on Syria threaten a new period of heightened Middle East conflict and raise the spectre of renewed US sanctions on Iran.
The United States, Britain and France on Saturday morning launched military strikes against "chemical weapons-type targets" in Syria, in retaliation for a suspected poison gas attack in the town of Douma which killed at least 60 people on April 7.
Talk of the US-led strikes helped ramp up tension in oil markets leading into the weekend, where geopolitical tensions had already pushed prices higher. Last week Saudi Arabia intercepted three missiles over Riyadh, reportedly fired by Iranian-backed Houthis in Yemen and targeting national oil company Saudi Aramco's assets.
In response, the international benchmark Brent crude oil price lifted 8.6 per cent last week to hit $US72.58 a barrel on Friday night, the highest since November 2014. Asian trade on Monday morning will offer the first glimpse of whether prices will be even higher.
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Syria's oil industry has been devastated by war, making it a very minor part of global supply, JP Morgan oil strategist Abhishek Deshpande said. The country produces about 25,000 to 30,000 barrels per day, against 350,000 to 400,000 bpd two or three years ago. But oil markets remained sensitive to any developments in the oil-rich Middle East, Mr Deshpande said.
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"The fact is that Syria is in the middle of a very high oil-producing region."
Analysts believe chances are rising that US President Donald Trump on May 12 will choose not to recertify his country's waiver on sanctions on Iran, which, alongside Russia, is backing Syrian President Bashar al-Assad. Further sanctions anticipated
"The suspected chemical weapons attack in Syria has heightened the chance that the US will impose further sanctions on Russia and reimpose them on Iran," Capital Economics commodities economists warned clients.
The Trump administration on April 7 imposed new sanctions on seven of Russia's richest men and 17 top government officials in the latest effort to punish President Vladimir Putin's inner circle for interference in the 2016 election and other Russian aggressions.
Mr Deshpande agreed that reinstated Iranian sanctions next month were a risk for markets, albeit one that was likely already largely priced in by markets and so would only add $US2 to $US5 to oil prices. The greater risk, he said, was that Europe also reimposed sanctions alongside the US, a scenario that would push crude "at least towards $US80, if not more".
While "definitely not a good thing" for markets already struggling with an array challenges, a 10 per cent climb in crude this year and a 25 per cent rise year-on-year "isn't the kind of stuff that qualifies as an oil shock by any standard", JP Morgan head of cross-asset strategy John Normand said.
Another leg higher to $US80 or higher in crude prices would, however, "prevent risky markets from making the gains they deserve to make in the second quarter," Mr Norman said.
"Whilst the risks to oil supply from possible sanctions on Iran or Russia and from damage to oil infrastructure are significant, we still expect the market to be in surplus this year and the recent surge in prices is only likely to incentivise further increases in drilling rigsand output, especially in the US," the Capital Economics team said.
Mr Deshpande, however, doubted that US shale would be able to respond sufficiently to fill the shortfall in supply, while OPEC countries would be "slow to respond". That would see oil prices "remaining higher towards the end of the year".
Nearly 500,000 have been killed in the long-running Syrian conflict, while the Yemen civil war has left an estimated 10,000 dead since it began in 2015.
