Syrian conflict should ensure oil breakout

While the Syrian war has seemingly reached a point of stability, recent events have heightened the chances of Western involvement, which should ensure strong gains for crude in the near future.

Oil
Source: Bloomberg

The Syrian civil war has raged on since 2011, with an uprising in the Middle East taking shape as a challenge to Bashar al-Assad’s leadership. In the seven years that have ensued, we have seen Assad taken from the brink of losing power, to the position of relative power he enjoys today, thanks largely to Russia. Russian interest in Syrian affairs stems from the need to have a military presence within the region. With the Syrian port of Tartus being leased to Russia to provide their only military base in the Mediterranean (and the Russian Navy’s only overseas base), the country has a very strategic need to maintain the status quo in Syria. This highlights quite why Syria is so very different to many other nations when it comes to Western involvement.

With recent events in Douma giving Western nations a reason to intervene, we are seeing a sharp rise in tensions between Russia and the West, with President Donald Trump shifting expectations on a daily basis, given his shifting tone on Twitter. No doubt the most important tweet of the week came on Wednesday where he promised nice, new, and smart missiles. While he has toned that rhetoric down since, stating that such an attack may not be immediately imminent, we do have a clear shift in the Syrian conflict towards greater Western involvement. While such involvement may be short-lived, the prospect of a US attack on Syrian interests has lit the fuse for oil prices. Traditionally, any conflict in the Middle East has proven supportive for oil, and this occasion has been no different, taking Brent crude to three-year highs. With both European and US forces likely to target Syria in the near future, this breakout for crude could have further to run yet.

Looking at the Brent weekly chart below, the break through $70.85 this week has brought about the highest price since 2014. Bullish engulfing patterns seen this week highlight that buying has taken place, even as we close out the week, highlighting that many see this as a market worth holding. Given that we are likely to see an attack in the near future, this does make sense. As such, a strategy of holding Brent crude longs in anticipation of a follow through on this breakout makes sense from here. The downside threat of all options being ruled out is unlikely, as this would send the wrong message to Assad. Thus, even if there is no attack, we are likely to see tensions maintained, which would also provide enough emphasis to support an extension to the current breakout we are seeing.

On the daily chart, look out for the potential role trendline resistance could play, with recent price action finding it difficult to break through this line.

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