The Potential Collapse of the Assad Government May Cause Disruption in the Oil Industry
The Potential Collapse of the Assad Government May Cause Disruption in the Oil Industry
The dismantling of the Assad regime in Syria won't directly influence global oil markets, but could exhibit bullish tendencies in the short term and bearish signs in the long run, contingent upon the evolution of the Middle East's new political landscape. Before the regime's demise, there was apprehension surrounding the potential intensification of hostilities between Israel, Hamas, Hezbollah, and Iran, and the possibility of these conflicts escalating and spreading. While it appears Iran has endeavored to prevent escalation, there remained speculation that an enduring truce might not be ensured, leading to increased violence either purposefully or accidentally. Israel has publicly declared no intention of targeting Iranian oil installations, but in the chaotic nature of war, policy shifts can emerge unforeseen.
The market has theoretically accounted for the possibility of a loss of 1 mb/d or more from Iran should Donald Trump tighten sanctions upon assuming office, although weak fundamentals seem to be counteracting this scenario. As illustrated in the following chart, Iran has successfully boosted their output by approximately 1.5 mb/d since Biden took office and further enhanced it by 700 tb/d in recent months. While oil prices are burdened by anticipations of a 1 mb/d decrease in OPEC's demand upcoming year, reduced Iranian supplies could counterbalance most of this decline. The broader group recently extended their voluntary reduction of 2.2 mb/d, but the likelihood of rising oil inventories in 2025 is evidently on exporters' minds.
The downfall of the Assad regime may lead to a more reasonable administration and weakened alliance of predominantly Shi’ite powers like Iran, Iraqi militias, Syria, and Hezbollah. This development should bolster the Trump Administration's resolve to enforce strict sanctions against Iran, primarily by curbing their oil exports. Inflicting economic hardship on their regime is likely to yield results given that their investment in Syria has proven unfruitful.
However, the extent to which Iran's exports have increased, attributable to the Biden Administration's inaction or Iran's own cunning evasion tactics, remains unclear. If the former is the case, Trump would have a greater likelihood of obstructing their exports, which would be beneficial for oil prices. The Saudis are expected to welcome such a situation, allowing them to bolster prices with the missing exports.
On the contrary, the collapse of the Assad regime might diminish the more hardline factions in Iran's government, thus facilitating a potential agreement with the United States, particularly by reducing support for the Houthis, Hezbollah, and Hamas. Such a reduction in support would be less controversial after the Israelis have weakened the latter two groups, especially Hamas. In the event that Iran significantly alters its support for these groups, such an adjustment may now be more accommodating to Iran than previously, and Trump, who'd promised reduced oil prices, should be gratified to ink a new agreement that loosens sanctions.
Nevertheless, such an agreement is unlikely to materialize without extended negotiations and will probably precede stricter sanctions. Consequently, there could be temporary support for oil prices in the meantime, perhaps adding $10 per barrel in the first half of 2025; however, an agreement would restore the sanctioned supply and exert pressure on the market later. In this scenario, not only would the former $10/barrel premium be eradicated, but prices could plummet by an additional $10/barrel, bringing WTI down to $60 and intensifying pressure on Iraq and the U.A.E. in particular to adhere to their quotas. If they fail to comply, prices are likely to dip below $60 without the Saudis reducing their production again, a prospect they are likely to resist.
Russia's reaction to the loss of its ally, which coincides with high losses on the Ukrainian front, may foster their willingness to negotiate an agreement to halt the fighting there. In this instance, expect an increase in supply from Russia, although they are already over quota. If Russia manages to add 0.5 mb/d or more to the market, maintaining a $70 price for WTI will become virtually impossible.
Therefore, in the context of underwhelming fundamentals, geopolitical factors on the oil market in the following year are likely to be substantial and probably erratic, as the year progresses.
- Despite the potential impact of the Assad regime's fall on Syria's oil production, OPEC, including key members like Iran, will still significantly influence petroleum prices globally.
- Donald Trump, during his presidency, aimed to tighten sanctions on Iran, targeting their oil exports, which could have led to a decrease in petroleum supply and an increase in prices.
- The dismantling of the Assad regime might weaken the alliance of predominantly Shi’ite powers like Iran, potentially making it easier for them to negotiate a new agreement on petroleum exports with the United States.
- The Trump Administration's strict sanctions on Iran and their oil exports, coupled with geopolitical developments in Syria, could have significant implications for the price of petroleum, potentially leading to a rise or a dip in the market.