Oil traders’ attention snapped back to Arab Spring

Arab Spring sprung

Ah, another sign of spring. No, not the weather but the Arab spring. While oil got slammed yesterday on European sovereign debt woes and fears that France may get a downgrade, the focus today may be on a new round of sanctions on Iran and another revolution in Egypt.

Oh sure, it helps too that the rating agencies reaffirmed the US credit ratings after the Super Committee seemed to lose its super powers. Reuters News said, "Rating agencies Standard & Poor's and Moody's said there will be no immediate downgrade of their credit ratings on the United States due to the failure of a congressional ‘super committee’ to reach an agreement on debt reduction. But Fitch, the third leading ratings agency, which currently has the most positive rating of the three on U.S. debt, said it could cut the outlook on its triple-A" rating, with a downgrade an outside possibility."

Yet while gold and silver plummeted, oil prices fought back off the lows despite the pressure in the outside markets as pictures of violence in Egypt flashed across the TV screen. Word that protesters were demanding an end to the military rule that has been in place since Hosni Mubarak was deposed caused the country's interim cabinet to resign. Yet the masses in the second Egyptian revolution don't seem to be buying it and appear even more determined than some of the Occupy Wall Street folks.

For oil traders the concern obviously is the stability of the Suez Canal and the SUMED Pipeline. According to the Energy Information Agency arm of the Department of Energy, "Closure of the Suez Canal and SUMED Pipeline would add an estimated 6,000 miles of transit around the continent of Africa. The canal is located in Egypt and connects the Red Sea and Gulf of Suez with the Mediterranean Sea, spanning 120 miles. Year-to-date through November of 2010, petroleum (both crude oil and refined products) as well as liquefied natural gas (LNG) accounted for 13 and 11 percent of Suez cargos, measured by cargo tonnage, respectively. Total petroleum transit volume was close to 2 million bbl/d, or just below five percent of seaborne oil trade in 2010. The EIA goes on to say that almost 16,500 ships transited the Suez Canal from January through November of 2010, of which about 20 percent were petroleum tankers and 5 percent were LNG tankers. With only 1,000 feet at its narrowest point, the Canal is unable to handle the VLCC (Very Large Crude Carriers) and ULCC (Ultra Large Crude Carriers) class crude oil tankers. The Suez Canal Authority is continuing enhancement and enlargement projects on the canal, and extended the depth to 66 ft in 2010 to allow over 60 percent of all tankers to use the Canal."

The other concern of course is the oil market's old nemesis — Iran. The U.S., along with the UK and Canada, slapped more sanctions on Iran's oil industry in the aftermath of the nuclear ambition report from the International Atomic Energy Agency. France is also calling for a ban on purchases of Iranian oil a move that if everybody went along with would cripple the Iranian economy and cause a shortage of oil supply in Europe. Of course the Chinese and the Russians are against new sanctions and are content to sit back while Iran makes the world a more dangerous place. A known terror state that has already threatened to wipe one country off of the face of the earth does not add to warm and fuzzy feelings about the peace and security of the Middle East, not to mention the rest of the globe.

Bottom line for oil, we sold off too much on fear and the geo-political risk means we may have hit a short-term bottom. With turkey on traders' minds and light volume, expect some weird moves, but today look to be patient and try to buy a break or sell a big rally.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.


Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.

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