Historically the world has experienced three major oil shocks: the OPEC oil embargo in the early 1970s, the overthrow of the Shah in Iran in the last 1970s, and the Gulf War. All three resulted in sharp (albeit short term) price spikes in crude oil. Could the Egypt crisis create the fourth?
Oil prices initially rallied after Egypt unrest hit the news, but have since backed off. Civil unrest in Egypt will only result in a new and sustained oil price spike if the Suez Canal is closed, and so far traffic is moving normally through the Canal. I would be cautious however, and not be short oil right now, at least not on an overnight basis. A trader just cannot exercise complaency in these markets!
The vast majority of Europe’s energy supplies are transported through the canal from key Mideastern oilfields. Most of the major oil companies in Egypt, including Royal Dutch Shell (NYSE: RDS.A) and BP plc (NYSE: BP), have already shut offices and evacuated workers. If companies in the region continue to withdraw their people volume of traffic through the Suez could diminish without a shutdown.
If concerns about safety in the region grow, insurance premiums for vessels through the canal will increase as well (adding to the price of crude). And if other countries in the region start to experience unrest one cannot rule out a closure of the Canal. A closure would remove 2 million barrels per day from supply and with the world demand and supply in a very precarious balance this definitely would result in the fourth major oil shock!
George Kleinman is President of the Lake Tahoe based commodity advisory and trading firm Commodity Resource. He trades oil (and other commodities) for himself and his clients. If you are interested in having George trade for you, email him for additional information. Email: email@example.com. Phone 800-233-4445.