Added tensions in Egypt and Libya have contributed to reactive spikes in oil prices. Saxo Capital Markets looks at the major triggers of oil price hikes, exploring the credibility of US oil production to compensate for Middle East supply problems.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, explains, ‘we are once again seeing oil markets primarily being driven by geopolitical tensions and fears about what happens next’. Oil price volatility is susceptible to speculation and fear; in recent months the price of Brent oil has risen sharply due to clashes in Egypt. Disrupted supply chains and oil price hikes are offshoots of Middle East violence, as Ole Hansen continues to report that ‘Brent crude oil rallied about USD 117 per barrel […] on increased worries that Western nations may embark on a military strike against Syria’.
US production lines help to offset oil price spikes, with price increases in Brent crude oil having been mitigated by US crude oil production. Market fears have been assuaged by the rise in production, which has climbed by more than 2 million barrels per day over the last year. Yet money managers continue to raise their bets that the price of crude oil will grow. In addition, President Obama’s refusal to agree to the Keystone XL Pipeline to expand US oil drilling programmes increases the dependency on Middle East oil, and heightens the importance of avoiding a disruption of supply routes.
It is conceivable that the conflicts in Syria, Egypt and Libya will have a spill-over effect across the Middle East. The impact in Saudi Arabia and Iran, the region’s two biggest exporters of oil and two of the largest oil producers globally, could trigger a precipitous rise in oil trading prices.
Libyan oil production is struggling with port strikes and pipeline shutdowns, reducing daily output to just 200,000 barrels per day, according to Reuters. This contrasts bleakly with the 1.4 million barrels produced daily in March, a steep dip in output.
A major chokepoint for worldwide shipments of oil is the Suez Canal in Egypt. Further unrest could hinder the transport of oil from the Suez Canal, and even have a knock-on effect onto other oil-exporting neighbours. Such a disruption, albeit unlikely, would have devastating effects on the shipment of crude oil and petroleum products; it is estimated that 4 million barrels of oil pass through the Suez Canal every day.
You can read Saxo’s infographic to find out more about what sparks oil price fluctuations. Saxo Bank’s Ole Hansen thinks that continued US oil production will serve to soften the blow of Middle East geopolitical instability. Do you agree? Join the discussion by joining Saxo Capital Markets on