Oil and equity markets today are focused on the war of words going on between Russia and the US over Syria. The oil price has surged in the last 24 hours, with Brent Crude oil up from around the $67 mark to over $72 today. Oil bulls will be lining up behind long CFD and futures positions in anticipation of more fireworks if the US follows through with further military action.
Part of the problem with Syria is that Russia has been firmly positioning itself behind the Syrian government of Bashar al-Assad, a regime that has allegedly recently carried out chemical weapons attacks on its own people. What changes things a little this time around is that Syria is meant to have parted with its chemical weapons already, under the terms of a deal brokered by Russia last time weapons of mass destruction were used in Syria in 2012.
Russia has now threatened unspecific reprisals if the US and its allies attack Syrian installations (although it seems that Israel has already carried out successful missile strikes against a Syrian air base earlier in the week, killing a number of Iranian military advisors). Some commentators in the media are worried about the possibility that tensions between Russia and the West could escalate further if the Trump administration carries out its threat to strike Syria.
Russia’s diplomatic debacle
But all this sabre rattling masks the fact that Russia is actually having a bad time of it diplomatically. Since the occupation of the Crimea in 2014 and the start of a proxy war with Ukraine, Russia has become increasingly diplomatically isolated. It has suffered repeated rounds of international sanctions, it has seen athletes banned from both summer and winter Olympics for doping, and most importantly it is losing the soft power that it exercised around the world during the Cold War.
This soft power is can be measured by how many friends Russia really has around the world. In the Middle East alone Russia has lost ground to both Iran and Saudi Arabia, both of which have been intent on expanding their own influence with military intervention and money across the region. With the fall of Muammar Gaddafi in 2011, Syria has ended up being Russia’s only real reliable long-term friend in the MENA area. Much is being made at the moment of Russia’s efforts to get closer to Turkey, but this is a temporary alliance of convenience for Moscow, and Russia has never enjoyed warm relations with Turkey, a NATO member.
Soft power is ebbing away
Outside the Middle East, Russia has also been losing influence, being replaced in the hearts of many leaders around Africa and Asia by China. Russia simply cannot compete against China when it comes to the sheer amount of money China can offer to countries in terms of infrastructure investment and cheap loans. Unlike Russia, China is not trying to make efforts to portray itself as a big threat: it occasionally rumbles, but where possible it will make efforts to try to downplay its influence. Russia likes to do the opposite, in order to be taken seriously.
This all boils down to whether Russia is prepared to back Syria militarily against the US, or leave this to Iran, which is already well on its way back into the USA’s sin bin (despite the efforts of the Obama administration to rehabilitate it). Syria is very important to Russia because much play has been made in the domestic Russian media by Vladimir Putin with regards to the success of Russia’s policy in supporting the Assad government in Damascus. Any reversals will not look good to the Russian public, and Putin will be conscious of this. But how much is Putin prepared to stake on Syria?
As the 19th century German chancellor Otto von Bismarck once said of the Balkans – “The whole of the Balkans is not worth the bones of a single Pomeranian grenadier.” Yet it was in the Balkans that the 1914-18 war started.
So with Syria, where will things go from here? The country has the potential to become a flash point for a bigger struggle given that Russia has invested much more political capital here than the current US administration. Turkey and Russia have made Syria a high priority. At the same time, Russia’s efforts to influence elections cannot be discounted – it has positioned itself as a clear and present danger to western democracy and it does not seem to be in a rush to dispel this.
All eyes on the oil market
Investors should keep a close eye on the oil price over the next few days: the rapid escalation of hostilities in the Middle East can drive the price of crude oil up rapidly, as we saw in 1973 and again in 1990-91. This is sometimes because traders are caught by surprise. We have seen some activity in the oil market over the last couple of days, but Brent Crude and WTI could easily push higher, depending on the extent of the US response.
If you are thinking about trading oil for the first time, take a look at the ETF market where there is a range of exchange traded funds that track the oil price. These include funds that will double the price movement, like ProShares Ultra Bloomberg Crude Oil (UCO), or if you are feeling extremely bullish, VelocityShares 3x Long Crude (UWTI). Bear in mind these are US-listed ETFs, denominated in dollars and based on the US WTI crude oil contract.
In the London-listed market, ETFS (now acquired by WisdomTree) has a x2 leveraged long Brent Crude ETF (LBRT).