HOMS, SYRIA – DECEMBER 06: Anti-regime armed groups advancing in Syria’s strategically important … [+] province of Homs, the gateway to the capital Damascus, reach the inner parts of the city center in Homs, Syria on December 06, 2024. (Photo by Izettin Kasim/Anadolu via Getty Images)
The fall of the Assad regime in Syria will have no direct impact on world oil markets but could prove bullish in the short term and bearish longer term, depending on how the new political structure of the Middle East develops. Before the regime fell, there was uncertainty about the potential for the conflict between Israel, Hamas, Hezbollah and Iran to worsen and spread. Although all indications have been that Iran has sought to avoid escalation, there remained concerns that without a lasting ceasefire, violence could increase either intentionally or by accident. Israel has indicated it would not attack Iranian oil facilities but the fog of war often hides impending changes in policy.
The market has theoretically priced in the possibility of a loss of 1 mb/d or more from Iran if Donald Trump were to tighten sanctions on that country upon taking office, although weak fundamentals seem to be offsetting that. As the figure below shows, the Iranians have managed to increase production by about 1.5 mb/d since Biden took office, and 700 tb/d in recent months. Although prices are weighed down by projections that demand for OPEC oil will drop by 1 mb/d next year, reduced Iranian supplies could offset most of that. The broader group just delayed the winding down of their 2.2 mb/d of voluntary cuts, but the prospect of rising inventories next year was clearly on the minds of exporters.
Iranian Oil Production (tb/d)
The overthrow of the Assad regime will hopefully lead to a more moderate government and weaken the so-called Shi’ite axis of Iran, Iraqi militias, Syria and Hezbollah. This will probably embolden the Trump Administration to take a tough stance against Iran, in particular by constraining their oil exports. Inflicting economic pain on the regime would seem more likely to yield results now that the Iranians have seen their investment in Syria prove wasted.
It’s not clear the extent to which Iranian exports increased because of inaction by the Biden Administration as opposed to better evasion tactics by Iran. To the extent that the former was true, Trump would have more success interdicting their exports which will be bullish for oil. The odds are that the Saudis will be happy with such a situation, allowing the lost exports to bolster the price.
On the other hand, the fall of Assad might weaken the more hardline factions in the Iranian government and make it easier for President Pezeshkian to reach an agreement with the U.S. Reducing support for the Houthis, Hezbollah and Hamas should be more palatable after the Israelis have weakened the latter two especially. A scenario where Iran substantially dials back its support for those groups might now be more acceptable to Iran than in the past, and Trump, having promised lower oil prices, should be delighted to reach a new agreement that eases sanctions.
But such an agreement is unlikely to be reached without some months of negotiations and will probably proceeded by tighter sanctions. Thus, there could be support for oil prices in the short-term, perhaps adding $10 a barrel in the first half of 2025, but then an agreement would restore the sanctioned supply and bring pressure on the market later. In this case, not only would the earlier $10/barrel premium disappear, but prices could drop another $10/barrel, taking WTI down to $60 and increasing pressure on Iraq and the U.A.E. especially to adhere to their quotas. If they don’t, prices are likely to drop under $60 without the Saudis reducing their production once again, an idea they would resist.
The reaction of Putin to the loss of its ally, coming at a time of high losses on the Ukrainian front, should add to his willingness to reach an agreement to halt the fighting there. In that case, expect more supply from Russia, although they are already over quota. Should Russia manage to add 0.5 mb/d or more to the market, it will be almost impossible to maintain a $70 price for WTI.
So, against the backdrop of weak fundamentals, the geopolitical influences on the oil market next year are going to be significant and in all likelihood wildly fluctuating as the year goes on.