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Oil drops as Syria risk seen muted after weekend air strikes

By Jessica Resnick-Ault
FILE PHOTO: Oil barrels are pictured at the site of Canadian group Vermilion Energy in Parentis-en-Born, France, October 13, 2017. REUTERS/Regis Duvignau/File Photo

By Jessica Resnick-Ault

NEW YORK (Reuters) - Oil prices dropped on Monday as investor concern waned about escalating tensions in the Middle East following air strikes on Syria over the weekend.

The United States, France and Britain launched 105 missiles on Saturday, targeting what they said were three chemical weapons facilities in Syria in retaliation for a suspected poison gas attack on April 7.

Oil prices had risen nearly 10 percent in the run-up to the strikes, as investors bulked up on assets, such as gold or U.S. Treasuries, that can shield against geopolitical risks.

"Some of the ease in Syria is the headline that is bringing it down," said Phil Streible, senior market strategist at RJO Futures in Chicago. Because the attacks were more surgical than anticipated in more extreme scenarios, the market has shrugged off bullish factors, he said.

"It has got everything to possibly boost it: weak dollar, Syria, potential sanctions, White House uncertainty, China trade," he said.

Brent crude oil futures <LCOc1> settled down $1.16 at $71.42, while U.S. crude futures <CLc1> were down $1.17 at $66.22 a barrel.

"As far as developments in Syria are concerned, the market has had a sigh of relief in the sense that there is no escalation, either diplomatically, or on the ground, following the intervention by the U.S., France and the UK," said BNP Paribas global head of commodity market strategy Harry Tchilinguirian.

"As a macro asset-allocator, if you want to hedge your portfolio against geopolitical risk, your prime candidate is oil, especially if that risk is in the Middle East."

Although Syria itself is not a significant oil producer, the wider Middle East is the world's most important crude exporter and tension in the region tends to put oil markets on edge.

"Investors continued to worry about the impact of a wider conflict in the Middle East," ANZ bank said.

Fund managers hold more Brent futures and options than at any time since records began in 2011, according to data from the InterContinental Exchange. [O/ICE]

Investors have added to their bullish positions in Brent, which now equal nearly 640 million barrels of oil, in nine out of the last 10 months.

The next event on investors' radar is potential U.S. withdrawal from a deal on Iran's nuclear restrictions, signed in 2015. U.S. President Donald Trump has threatened to withdraw the United States from the pact, barring action from Congress and Europe.

Even the imposition of unilateral sanctions by the U.S. government could hamper exports of oil from Iran, one of the world's largest producers.

"Oil is still holding relatively well and the mid-May Iranian deadline is going to be a bit of a subject for the next four weeks," Petromatrix strategist Olivier Jakob said.


(Additional reporting by Henning Gloystein and Roslan Khasawneh in Singapore and Amanda Cooper in London; Editing by Louise Heavens and Matthew Lewis)