E Political Angle Driving Oil Higher

As Turkey, alongside Saudi Arabia and Qatar see the balance of power in the Syrian proxy war effectively shift back towards the Assad regime, recent trial balloons and troop buildups could be a game changer in the ongoing conflict. The rising probability of a wider conflict unfolding in the region means that Syria could be the spark that lights an even larger fire. So far oil prices have responded in similar fashion to “buy the rumor” and “sell the news”. The rapid rally higher comes on the heels of data from OPEC and other global output centers showing in many cases production is continuing to rise. Now that peace talks in Switzerland have stalled between the parties, a growing offensive from pro-regime forces in Aleppo may finally tip the scales in the conflict, setting the stage for a regional war and a greater risk premium for crude.

Stakes Are High

After persistent efforts to unseat Bashar al-Assad have resulted in repeated failures following expanded foreign intervention from the regime’s supporters, long-time backers of the rebels are now reassessing the situation. With the rebels increasingly encircled in Aleppo, should the city fall, it would mark a turning point in civil war. Now that the momentum has shifted in favor of the Russian led operation to rout out rebels and IS, Turkey is reportedly growing its military presence opposite the Syrian border, amassing for a possible invasion and potentially dragging in NATO. This has set off tensions across the region with Russia’s defense ministry warning about ongoing preparations.

Saudi Arabia has also offered to join the fray, issuing a trial balloon last week about the possibility of sending ground troops to fight IS alongside the coalition in Syria. The message that ensued from Syrian Foreign Minister Walid al-Moallem pledged several times that foreign troops entering the nation without permission would “return home in wooden coffins”. This multi-angular nature of the conflict dictates that in spite of fighting an ongoing civil war, the Assad regime now faces the threat of invasion.  This would likely provoke a strong reaction from the Russians and Iranians, dragging the region even closer to chaos. A regional war could ignite a conflict of global magnitude, adding to the growing risk premium in oil prices.