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How the Syrian crisis could roil the oil market

Briefing highlights

  • Syrian crisis could vex oil market
  • Short positions rise against loonie
  • What to expect from Bank of Canada
  • What else to watch for this week
  • Wells Fargo claws back millions from former executives
  • Barclays CEO probed in whistleblowing case

Vexing the market

Syrian oil output has long been shut down, but the mounting crisis could roil crude markets in other ways, largely because of Russia and Iran.

Oil prices rose Friday, and again Monday, as markets weighed the possibility of heightened U.S. involvement in the region.

It’s not the threat to oil supplies after the U.S. air strikes on Syria, where the civil war shut production of 380,000 barrels a day, said Helima Croft, Royal Bank of Canada’s global head of commodity strategy in New York.

Unless, of course, fighting escalates and spreads to nearby oil-producing countries. But that’s unlikely, Ms. Croft said. At play at this point, rather, are Russia’s relations in the Middle East and the coming presidential election in Iran.

“Given that President Trump had previously signalled deep disdain for humanitarian interventions and Middle Eastern military engagements, we are now in uncharted waters and we think that many of our earlier prevailing assumptions about the implications of the conflict in Syria may be upended,” Ms. Croft said in a report.

Oil prices are now being supported by a production-cap agreement among OPEC and non-OPEC countries, notably including Russia. And there’s talk of extending the pact for six months.

Ms. Croft wondered whether the latest developments could spark tension between Russia, which backs Syria’s Bashar al-Assad, and Sunni states that support the rebels.

“Up to this point, Russia has been able to maintain its support for Assad and warm relations with Iran, all while concluding arms deals and energy co-operation agreements with countries like Saudi Arabia,” Ms. Croft said.

“Therefore, Syria was not an intractable obstacle for Moscow in working with key Sunni states,” she added.

“However, it will be important to watch whether Syria does emerge as something of a deal-breaker in the wake of the conflict’s altered dynamics. The anti-Assad rebels may now believe they have a new lease on life and their foreign sponsors could up their aid, especially if Assad were to double down on brutal tactics in an effort to win the war. President Putin, for his part, shows no signs of pulling back support for his ally Assad and surrendering Russia’s main Middle East outpost of influence.”

Ms. Croft also raised the possibility of the air strikes altering the course of politics in Iran, where President Hassan Rouhani had been seen as winning a second term with the support of supreme leader Ayatollah Ali Khamenei, even amid criticism of the nuclear pact that led to the easing of Western sanctions.

“A key question now is whether Khamenei decides to tip the scales in favour of a more hardline candidate in light of Iran’s strong support for Assad, most notably the weapons and manpower provided by the Revolutionary Guard’s Quds Force to the Syrian strongman,” she said.

“The nuclear deal and the sanctions relief that enabled the return of Iranian oil exports would certainly be imperilled if Rouhani were defeated by a candidate with more hawkish/anti-American credentials.”

If the Trump administration holds its fire now, and makes no attempt to get rid of Assad, however, the fallout in oil markets would “remain negligible.”

Chart of the day

Speculators are increasingly choosing sides when it comes to the Canadian dollar.

The latest report from the U.S. Commodity Futures Trading Commission shows a net short position against the loonie continuing to build, rising again last week to stand at $2.3-billion.

That’s the biggest net short since early March, 2016, Bank of Nova Scotia strategists Shaun Osborne and Eric Theoret said in a report on the CFTC numbers, measured as of last Tuesday and released Friday.

The latest numbers show “risk being added to both sides,” they said.

What to watch for this week

Bank of Canada Governor Stephen Poloz takes centre stage Wednesday with an interest rate decision and monetary policy report expected to include upgraded forecasts for the economy.

This comes as some observers believe Mr. Poloz has been too much of an Eeyore as economic prospects improve.

And while he and his central bank colleagues won’t move their benchmark overnight rate from its current 0.5 per cent, they are expected to acknowledge the brighter outlook while still stressing global uncertainties.

Both the policy statement and report will “likely be neutral while accentuating the downside risks,” said Bank of Montreal senior economist Benjamin Reitzes.

“Indeed, Governor Poloz wants to ensure that bond yields and the Canadian dollar stay under wraps. Even so, the data have clearly turned more positive, and the bank will have no choice but to upgrade their GDP growth forecast materially.”

Mr. Reitzes and other economists believe the central bank could raise its forecast for economic growth this year to about 2.3 per cent from its earlier projection of 2.1 per cent.

“The real drama will be around how the BoC acknowledges the robust data backdrop both in the statement and in its forecasts,” said Bipan Rai, executive director of macro strategy at CIBC World Markets.

“For now, the odds are that the bank will continue to wax dovish to lean against potential [Canadian dollar] strength, he added, noting that the loonie has dropped by more than 6 per cent against a basket of export-competing currencies since the central banks last monetary policy report.

There’s more on tap this week, too:


We’ll get the latest reading of the Teranet-National Bank home price index in the morning.

Just a wild guess here, but expect to see that Toronto prices surged again in March, as other reports have illustrated.

The more interesting finding may relate to Vancouver, where prices slipped earlier on a monthly basis, then were flat, and then perked up again in February.


Expect to see a sour report on the manufacturing sector from Statistics Canada, which observers believe will show a drop in February sales of 0.5 to 1 per cent.

“Factories have had a good run recently, with value-added from the sector breaking out of the range it’s been in for over two years,” said Nick Exarhos of CIBC World Markets.

“But even after a pullback in February, a slippage in auto sales stateside will make growing shipments in a key category harder in the months and quarters ahead.”

This is also a key week for corporate earnings as America’s big banks begin reporting. Up first are Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co.

We’ll also see a financial stability review from the Reserve Bank of Australia, which Canadians should watch closely because our mates have been struggling with their housing market, too.

“Two of the RBA’s regulatory cousins have recently announced measures to tighten lending in the mortgage market, and Governor [Philip] Lowe spoke at some length on the overall situation after the April board meeting,” said observers at RBC.

“The FSR will provide more detail on how those policy changes will influence household and bank balance sheets, as well as provide an update on the broader financial system.”


The U.S. government releases reports on retail sales and inflation, the former expected to be flat or down in March, and the latter projected to ease to 2.6 per cent on an annual basis.

“There’s no disputing the downshift in consumer spending this year,” BMO senior economist Sal Guatieri said the retail sales report.

“The only question is whether it’s the start of a disturbing new trend or merely a temporary breather after a strong 2016. We lean toward the latter given still supportive household fundamentals and vibrant housing sector (pushing furniture sales).”

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