Fears that the diplomatic tensions in Syria could spill over into sanctions, or war, has added a growing risk premium to the oil price. Brent crude rose to its highest level since 2014 last week, reaching over $72/bbl. The price has also been supported by a weakening dollar over the last year. While there are some  strong arguments for a continued increase in the price, higher prices will make it increasingly attractive for oil companies to bring higher cost production online. In particular, there is likely to be an acceleration in the production of US shale oil, potentially weakening the long-term position of OPEC (the Organisation of Petroleum Exporting Countries). Nevertheless, higher oil prices will add to global inflationary pressures until increased supply is realised or fears of conflict dissipate.

US Inflation

The US headline consumer price inflation (CPI) rate accelerated in March, to 2.4%. Furthermore, the core CPI, which excludes volatile food and energy prices, posted a rise of 2.1% over the year to March up from 1.8% in February. These latest figures will add to the evidence that price pressures are increasing as the labour market is tightening and may increase the pressure on the Federal Reserve to raise rates at a more rapid pace. Fed officials are currently anticipating another three 0.25% rate rises this year although some are suggesting that this could stretch to four if wage growth and inflation continue to pick up.

Syrian Conflict

Last week saw increasing concern over the potential reaction by the US and allies over a chemical weapons attack on civilians in Syria. Investors were concerned with the reaction of Russia to any attack, particularly if there were casualties. However, the missile strikes took place over the weekend and it appears that a risk of an escalation has diminished. Nevertheless, there will be an ongoing risk from the region, which has a complex mix of players with differing objectives, often fighting proxy battles through the many rebel factions and government forces.

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