Syrian action raises oil price fears By Middle Eastern standards the Syrian oil industry is a tiddler. With the country's civil war now entering its third year, oil production also slowed to a trickle long ago. Yet talk of western airstrikes in response to the Syrian regime's alleged use of chemical weapons has added $7, or more than 6 per cent, to the price of benchmark Brent crude in just two days. That rally - which saw Brent hit a six month high of $117.34 a barrel on Wednesday - is adding to the energy costs of governments, businesses and households across the world, at a time when emerging market currencies have fallen sharply against the dollar. Some argue it has further to go. Société Générale analysts say Brent is likely to reach $125 a barrel if the west does launch airstrikes, and could touch $150 a barrel if such strikes disrupt production. The growing likelihood of western intervention in Syria comes at a time when the oil market is much tighter than many had foreseen. Rapid growth in supplies from North America's shale revolution and relatively muted demand growth from a slow growing global economy were meant to lead to plentiful spare capacity this year. Instead, oil prices have been trending upwards all summer on a series of supply disruptions from the North Sea to Nigeria. In the past two months, almost a million barrels of daily production have gone offline in Libya, as strikes and militia activity have forced the closure of export terminals and oil fields. "The underlying physical market is extremely tight, the Syria headlines were just the signal the market needed to get really long," says Donal O'Shea at the UK fund manager Hermes, which has $2bn in commodity assets, and is positioned for a further rally in Brent. For the oil market, the possibility of airstrikes on Syria has focused attention on two countries in particular. The first is neighbouring Iraq, a country whose 3m barrels of daily oil production account for more than 3 per cent of global supplies. Sunni militant groups fighting the regime of Bashar al-Assad in Syria also operate increasingly freely across the border. Earlier this month a truck bomb exploded at the Umm Qasr docks near Basra in Iraq's Shia-dominated south. The country's principal oil-producing region had seen a lull in violence in recent years, but fears are now growing that oil installations are vulnerable to further spillovers from Syria. An attack on West Qurna or Zubair [two of the largest Iraqi fields] would be disastrous for the market. Recent attacks show the geography is not out of reach," says Helima Croft, a former CIA analyst now at Barclays. On Wednesday, Nouri al-Maliki, Iraq's prime minister, said security forces had been put on high alert ahead of an expected strike on Syria. The second country to watch is Iran. While Tehran's oil production and exports have been severely curbed by US-led sanctions, it is the main backer of the Assad regime. Some analysts fear Iran could encourage reprisals by Hizbollah in response to western air strikes on Syria. Iran could also link a solution to its standoff with the west over its nuclear programme to the Syria conflict, or it could disrupt shipping through the Strait of Hormuz, a key transit point for oil tankers. At a stretch it could encourage unrest among Shia minorities in Gulf producers such as Saudi Arabia, which has backed the rebels in Syria. "If you attack Iran's closest regional ally in an area it considers its backyard, it will impact Tehran's behaviour on any number of issues," says Richard Mallinson, chief policy analyst at Energy Aspects, a consultancy. But for some in the oil market, these issues are too theoretical to justify the price rally this week. "It is hard to see where incremental production gets affected," says a senior executive at a large physical oil trader, who questioned whether the Brent rally could last much longer. Oil futures and options traders say the rise in Brent has at least partially been driven by flows into oil from other asset classes. "We're seeing people who are not normally in the market buying today," said the head of oil trading at one large bank on Wednesday. He suggested equity and foreign currency money managers could be using oil as a hedge as other markets sell off on fears of western entry into the Syrian conflict. And sceptics of the rally also note that industrialised economies could co-ordinate a release of strategic crude reserves, last used during the Libyan civil war, while Saudi Arabia has around 2m barrels a day of spare production capacity.