While Syria does not contribute substantially to global oil supply, its role in the broader geopolitical scene, particularly concerning neighbouring Iraq, holds significant implications for oil prices and market stability. As instability in Syria reverberates throughout the region, the potential for spillover into Iraq could drive up geopolitical risk premiums, leading to higher oil prices in the near term.

The latest developments in Syria have already begun to alter the balance of power in the region. Syria's alliance with Iran, in particular, has exacerbated tensions with Western powers and regional players, drawing attention to its potential to influence oil market dynamics. Iran, which faces significant economic and political pressure due to ongoing sanctions, is heavily invested in maintaining its influence in Syria. The axis of cooperation between Russia, Iran, and Syria has created a volatile environment that is influencing broader regional stability, particularly in neighbouring countries such as Iraq.

Iraq, a country that plays a critical role in global oil supply, is deeply affected by the situation in Syria. Iraq produces approximately 4.1 million barrels per day (bpd) of crude oil, making it one of the top producers in the world. The country’s northern and western regions, close to Syria, have been particularly vulnerable to instability in Syria. Sectarian tensions, ongoing militia activity, and the presence of various armed groups have created a volatile environment in Iraq that is increasingly influenced by events in Syria. As the situation in Syria continues to evolve, the risk of further destabilization in Iraq remains high. This could have serious consequences for oil production and supply from Iraq, particularly if the northern oil fields or export routes through the Kurdish region are disrupted.

The potential for spillover from Syria into Iraq is a key factor that could drive up the geopolitical risk premium in the global oil market. Any significant disruption to oil production in Iraq, whether through direct conflict or instability in the region, would have a ripple effect on global oil prices. With oil prices already subject to fluctuations based on geopolitical developments, further tensions in Iraq could push prices higher, as markets price in the risk of supply disruptions. The impact on the oil market could be felt on multiple fronts, from the immediate effects on production and exports to longer-term shifts in market sentiment.

However, there is an argument to be made that the geopolitical risks associated with the ongoing conflict in Syria might, in the longer term, reduce the geopolitical risk premium in the oil markets. If the power equations in Syria were to become further weakened, there could be a shift in the region’s balance of power. A weakened Iranian regime, under significant pressure from both domestic unrest and external sanctions, might seek to de-escalate tensions with the United States and other Western powers. Such a shift could lead to a reduction in the broader geopolitical risks that have fuelled oil price volatility in recent years. In this scenario, a more stable geopolitical environment in the Middle East could help to ease tensions in oil markets, reducing the risk of further supply disruptions and potentially lowering prices in the medium to long term.

Despite the possibility of a long-term reduction in geopolitical risk, the short-term outlook for the oil market remains uncertain. The immediate impact of Syria’s ongoing conflict is likely to push up geopolitical premiums, as investors price in the potential for further instability in the region. As oil prices are often highly sensitive to perceived risks in key production regions, the uncertainty surrounding Syria’s future trajectory could weigh heavily on market sentiment. The market’s ability to absorb shocks from Syria’s instability will depend on several factors, including the resilience of Iraq’s oil production, the willingness of Iran to engage in negotiations with Western powers, and the broader strategic calculus of regional players like Saudi Arabia, Russia, and the United States.

Any disruption to Iraq’s oil production could have significant implications for global oil supply, especially as countries like the United States, China, and India continue to rely on Iraqi oil. Iraq’s southern oil fields, which account for the majority of the country’s production, have generally been more secure than the northern regions. However, the risk of militia activity and sectarian violence in the north, particularly near the Kurdish region, remains high. The possibility of renewed conflict along Iraq’s border with Syria, particularly if Kurdish forces are drawn into the conflict, poses a serious risk to the stability of Iraq’s oil production. Additionally, any disruptions to Iraq’s oil exports through the Turkish Ceyhan pipeline or through the Persian Gulf could send shockwaves through global markets.

The broader implications of Syria’s instability extend beyond Iraq. Saudi Arabia and other Gulf producers are closely watching developments in Syria, as the conflict has direct implications for the broader security of the region. The Saudi-led coalition’s involvement in the war in Yemen and the country’s ongoing rivalry with Iran have compounded the regional uncertainty. Should Syria’s conflict escalate further, it could trigger a broader regional conflict, further destabilizing the global oil supply chain. Saudi Arabia, as the world’s largest oil exporter, is well positioned to adjust its production in response to any significant supply disruptions, but it cannot fully mitigate the effects of a prolonged regional conflict on oil prices. (IPA Service)