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Damascus Dodges a bullet, Make This Crude Oil Move Immediately

Commodities / Crude Oil Sep 18, 2013 - 03:39 PM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: Damascus may have dodged a bullet (or a cruise missile), but nothing else has changed very much. Not in terms of risk.

That explains why the "Syrian Premium" remains. It may be slightly reduced, as you'll see. But it is likely to stay with us even after the threat of a military solution has been averted.


At least for now...

But in addition to the ongoing uncertainty, there are other aspects of market pricing that are coming into focus. These pressures were building even before the latest round of Syrian intrigue.

They involve the traditional factors of supply and demand, with some regional wrinkles thrown in for good measure.

I will have more to say shortly about the best way you can profit from these opportunities. But for the moment, there's one move to make in the immediate aftermath of the latest Syrian developments.

Here's my full briefing...

The U.N. Chemical Weapons Report Emerges

The U.N. report on chemical weapons usage in Syria, released Monday, may not hold the Assad regime responsible for their usage directly. But the conclusions certainly supported the version put forward by Washington, Paris, and Riyadh.

The August attack on suburban Damascus employed massive amounts of sarin gas in a coordinated effort, one labeled a war crime in the report and the worst witnessed worldwide in 25 years. It required missile delivery systems, while the trajectories indicated launches from territory controlled by government forces. That combined with earlier intelligence discounting that the opposition had access to such nerve gas leaves little doubt.

Whether authorized by Syrian President Bashar al-Assad or some underling, this was a coordinated attack on civilians using a substance held in distain by the global community. Russia is continuing to question which side in the festering Syrian civil war bears responsibility.

On the other hand, Cyrillic lettering on casings points toward Moscow's hand in providing Assad with the weapons. They were also more potent than initially thought. The U.N. report concludes the gas was of higher quality than sarin found in Saddam Hussein's arsenal in Iraq.

A few weeks ago, all of this would have been enough for the U.S. to initiate a missile attack of its own on military installations inside Syria. The report may have been enough for the U.K. to come on board (the Parliament in London had refused to support a military move pending the report) and may have even attracted additional European support.

But the situation changed dramatically late last week...

A Deal for International Control

The Russian-brokered deal places Assad's chemical weapons under international control, with destruction of them set for the first half of 2014.

Now, those experienced in such matters flatly declare the time scale is unrealistic; accounting for 100% of the weapons is also not possible.

But the threat level is reduced. A powder keg situation had turned from a threatened military reprisal to a diplomatic initiative - one now likely to have a U.N. Security Council resolution to back it up.

Much is unresolved in this approach. But it does mean, at least for now, Washington has pulled back from an attack while Moscow has bought some time for its erstwhile ally.

Nonetheless, the reduction in tension, even if it turns out to be short-lived, will have an impact on oil prices.

How to Play the Next Big Oil Move

As the crisis escalated, what I have called a "Syrian Premium" (about $4 per barrel in New York and London) had been introduced into the pricing for crude. That premium had increased as the rhetoric on war increased.

As trade opened Tuesday morning, West Texas Intermediate (WTI, the benchmark crude traded on NYMEX) stood at a bit above $106 and Brent in London at more than $109. These levels were down 2.7% and 3.2% for the week, respectively.

Yet each still remained more than $3 a barrel above the anticipated pricing levels in the absence of a Syrian crisis.

In short, the prices have eased, but a premium remains.

That's because much uncertainty remains, as well.

Will the diplomatic approach succeed? Will the weapons be catalogued and destroyed? Will the Security Council step up and put some serious sanctions on Damascus? Will the new U.S.-Russian joint approach hold?

You can see why oil's volatility will continue even with chemical weapons use off the table. The Syrian mess remains even without the impending U.S. attack. The stability of the entire region is at issue, the conflict deepens, the Saudi-Iranian disagreement over surrogate plays in the Persian Gulf region is becoming worse, and the pressures on the global crude oil outlook remains pressured as a consequence.

So here's what to do...

1. Take a profit.

It's time to pull back a bit on exchange-traded fund (ETF) holdings allowing moves playing the WTI-Brent crude pricing spread. I have suggested previously the two primary plays here are PowerShares DB Energy (NYSE Arca: DBE) and United States Brent Oil Fund (NYSE Arca: BNO).

DBE provides a play on both the WTI-Brent spread as well as crack spreads (the difference between the crude oil prices and those for selected oil products). BNO is a straight entry into dollar-denominated Brent pricing in London.

Both have made gains during the Syrian run up, and some of that profit needs now to be creamed.

2. Redeploy the proceeds.

It's time to position yourself for regional variations in price. They're approaching. Fast. Here, the strategy will offset companies controlling large amounts of oil availability in certain global areas with the pricing variations emerging.

Simply put, this approach will be locating where the difference is pronounced enough to generate an added premium.

Much more on this as we move forward...

Source :http://moneymorning.com/2013/09/18/make-this-oil-move-immediately/

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