Crude Spikes on US Syria Strike, and Analysts Expect More Gains With the Possibility of a Return to `Risk Premium'

John Kilduff suggests that Friday's market reaction is being overly analyzed.

Once again, fear - this time in the form of the U.S. missile strikes against Syria - has propelled crude prices upwards, on Friday to one month highs with traders pricing in a possible supply route disruption, thus causing Brent to climb 29 cents to $55.12 per barrel and West Texas Intermediate to rise 40 cents to $52.10.

And even though Syria is a minor oil producer within the larger context of the Middle East, pundits point out that the U.S.'s aggression exacerbates the fault lines between that country, Russia, and Iran, thus exposing the market to risk on several fronts, including even the possibility of the Organization of the Petroleum Exporting Countries (OPEC) deciding not to extend its production cuts to the end of this year.

Most of the trepidation is in reaction to Russia claiming that the missile strikes violate international law and have seriously impacted, if not altogether ended, any chance of mending relations between the U.S. and the former Soviet Union.

But that reaction was to be expected, and for the main U.S. president Donald Trump's action against Syria's Assad regime has met with strong approval on the international front; presumably with this in mind, John Kilduff, founding partner of Again Capital, took a bird's eye view of the situation and suggested that Friday's price hike should not be overly analyzed: "Oil prices have naturally reacted to the U.S. bombings of Syria; it is their wont to rally on news like this, but they have always fallen back," he told CNBC.

As other analysts flocked online to express their worry about possible supply disruptions, Kilduff pointed out, "The fact is that oil infrastructure is rarely damaged, and the petrodollars are the spoils of war — neither side wants to kill the 'petro-goose.'

"If anything, this airstrike sets back ISIS and makes Middle East oil supplies more secure, not less."

Writing for BloombergGadfly, Liam Denning, an energy and commodities specialist, agrees that "the extra buck or so added to Brent crude prices in the wake of Thursday night's U.S. missile strike is clearly more about the addition of risk rather than the subtraction of actual barrels.

"And that extra buck or so wasn't exactly game-changing, even before it was all given back by early Friday morning."

However, Denning notes that the addition of risk to the market is a problem for Saudi Arabia "as it tries to play central banker to an unruly oil market......Saudi Arabia is on the verge of trying to monetize its vast oil reserves via an IPO, so it needs stronger oil prices - but it ultimately needs that strength to reflect the qualities of the product it's selling, not the drawbacks."

Jonathan Chan, analyst for Phillip Futures, thinks prices may well continue to climb: "If this conflict prolongs or escalates with Russia possibly intervening on the Assad regime's side, there may be further upward adjustment on the geopolitical risk premium."

But Ole Hansen, head of commodity strategy at Saxo Bank, doubts that the rally will last, due to fundamentals: "The world still awash in oil; the risk of this developing and impacting oil supplies from the region, especially from Iraq, is very limited."

Earlier this week, some experts took a dim view of the latest crude price gains: Robert Yawger, director in energy futures at Mizuho, said, "It's hard to justify the move on the back of fundamentals" - a reference to the U.S. Energy Information Administration reporting an increase of 1.57 million barrels of crude inventories for a record 535.5 million barrel total, which came as a shock to traders who believed other forecasts indicating that a substantial drawdown was to occur.