Financial Syriousness

Allegations of Syria using chemical weapons have been appearing and consequent action seems likely. While Jay Carney, the White House spokesman has said ‘there must be a response’, Syrian Foreign Minister Walid al-Moallem said the country would use ‘all means available’ to defend itself. Many are anticipating military action from the US, post the heavy exchange of words between various international parties. All of the ‘likelihood’ has resulted in large shifts in the financial world.

Equities across the globe have seen a downfall as a result of this. The Dow, Nasdaq and S&P 500 closed lower yesterday by 1.14%, 2.16% and 1.59% respectively. The CBOE VIX index rose by 12% yesterday, indicating increased volatility and expectations of a downfall in equities. In Europe, the FTSE 100 declined by 0.79% and the DAX, CAC 40 and IBEX 35 declined by 2.28%, 2.41% and 2.96% respectively. Most Asian markets too have been seeing a heavy sell-off.

Meanwhile, prices of oil have shot up. The October 2013 contracts for crude futures on the NYMEX touched a high of USD 112.24 today. What are the possibilities of supply disruptions if there is further development on the Syrian front?

For starters, Syria isn’t a significant oil producer. According to the US Energy Information Administration, the country produced 330800 barrels of oil per day in 2011. To give you a relative measure of the extent of production, Iraq produced 3 million barrels per day in 2012. So a considerable supply crunch because of production being hampered is not a big worry as such.

Moreover, Syria has estimated proven reserves of 2.5 million barrels as of January 1, 2013. This is a total larger than all of Syria’s neighbours except Iraq. However, much of this is heavy and sour, making processing complex and more expensive. But, the important thing to note is that Syria has lost much of its export capabilities because of international sanctions, particularly by the European Union.

These factors have resulted in minimal impact on global crude supply as a result of the direct production and trade activities of Syria. The real reason of worry is the possibility of events leading to an escalation of violence and hence a resultant disruption in supplies.

The possibility of proliferation exists from the indirect clash of the US with other major countries extending their support to Syria. This would make matters complex and also expand the scale of the issue. An example of this is how Iran could block the Strait of Hormuz. The narrow strait is used for transporting most of the oil exported from the Middle East to the West.

These developments would lead to a further increase in oil prices. Emerging markets have been seeing a downfall ever since the Federal Reserve has voiced its intention to cut down on its USD 85 billion per month bond-buying programme and eventually to withdraw it completely. This has resulted in a consistent outflow of funds from emerging markets. Its repercussions can be seen from the extent to which stocks, bonds and currencies of emerging markets have taken a hit.

The issues that these countries will face will only aggravate if things get worse. The rise in oil prices will only lead to added pressure on economies like that of India. Battling the pressures of a massively depreciating currency that is touching new lows every day, coupled with an increasing import bill will lead to significant pressure on the economy.

Additional pressure may be caused by the rise in the price of gold. Gold has moved up strongly as investors are looking at it as a safe asset. However, many are of the view that this buying spree will only be short-lived because of the short-term nature of this particular uncertainty. A contrarian view is being developed because of the short-term trend and the overbought nature of gold.

Overall, implications will be seen only if the US takes military action against Syria. And additionally, if the matter escalates and grabs the involvement of other international parties.