This upheaval came out of left field and really surprised people
(PRWEB) February 03, 2011
(PRWEB) February 3, 2011 -- On Friday 28th January, the price for U.S. benchmark crude oil futures leapt $3.70, or more than 4%, to $89.34 a barrel. By Monday 31st January, Brent Crude had passed the $100 a barrel figure for the first time since October 2008, and it went as high as $101.73. On Tuesday 1st February, futures in New York rose 3.2% as opposition groups urged more people on to the streets and the protests grew in both Cairo and Alexandria. Prices seemed to have levelled out by the close of trading yesterday and according to Aliom, an ASIGroup affiliated broker, the market may be turning its eye to the overnight events within the Middle East.
Whilst Egypt is not a major oil-producing company, it is the home of the Suez Canal and the Suez-Mediterranean pipeline, and is therefore a key shipping route for oil and associated products. About 3 million barrels of crude oil flow through the Suez Canal and the SuMed Pipeline per day. Traditionally Egypt has never been a significant player in the world economy but the present political unrest has triggered fears of long term damage to the economy if the crisis deepens or spreads.
The protests have sparked fears that the canal or the pipeline could be closed. The closure of the Suez Canal or the SuMed Pipeline would divert tankers around the southern tip of Africa, adding about 10 days to the transit time of oil tankers and effectively tying up tanker capacity. According to the head of traffic for the Suez Canal Authority, Ahmed El Manakhly, the canal is operating normally amid the mounting pressure - currently 56 vessels are passing through the canal, which is more than the recognised average of 50.
So, if the canal and pipeline have yet to be affected by the turmoil, why has the price of oil jumped so dramatically in the past few weeks? During the 'tanker wars' of the 1980's, attacks on tankers caused a reduction in oil shipments while the price rarely reacted more than 50c per barrel - and prices were between $10 and $32 per barrel back then. During the past week, the price of crude oil has surged by about 8%.
While The ASIGroup believes that the current turmoil and uncertainty in the Middle East has undoubtedly had an effect on this increase, analysts also believe that a reduction in the contango spread, and increased earnings from ExxonMobil, have helped the market advance while oil prices were buoyed by the strength in the stock market.
"This upheaval came out of left field and really surprised people," said Michael Lynch, president of Mass.-based Strategic Energy and Economic Research. "People are afraid of a domino effect - spreading to places like Saudi Arabia - and that's helping to affect the market."
The ASIGroup believes the higher prices may reflect the re-emergence of a political-risk premium that has long been absent from the market. But, the political uncertainty is just one of the factors causing the rally - there are a host of increasing consumer demand factors which have been pushing markets higher over the last few weeks.