Mounting Tensions in Middle East to Push Oil Prices Higher?While many Americans might be disturbed by recent news of the ongoing mass violence in Egypt, it’s unlikely that many have considered the economic impact the growing violence could have on America. And if you think the impact won’t be all that significant, you would be wrong.
Oil prices are already seeing the effects of the violence, as the market sector is extremely sensitive to any increase in political uncertainty on the world stage.
While it is true that Egypt doesn’t actually produce much oil, there are two crucial factors that play into Egypt’s significance to this market sector: the Suez Canal and the Suez/Mediterranean pipeline.
Most people are unaware of how tight the supply of oil is globally. Any interruption in the supply chain will send oil prices up significantly.
We’re already seeing the impact the riots are having on the market, as oil prices have risen substantially over the past couple of months. This market sector doesn’t run with a lot of excess slack, and making up the shortage of supply is extremely difficult to do on a global basis.
According to the U.S. Energy Information Administration (EIA), approximately seven percent of all oil transported globally by sea went through the Suez Canal. If this route is affected, oil prices would have to rise, and this market sector would need to adjust to the lack of available routes.
The next available route from Saudi Arabia would be to go around the bottom of South Africa, which means a massive amount of additional miles. These increased costs borne out by this market sector would then translate to higher oil prices.
While the chances are low that the Suez Canal would be shut down completely, clearly, investors in this market sector are preparing for such an eventuality, as oil prices remain elevated. The one thing you don’t want to do as an investor is short oil prices, as violence continues to escalate.
But the Middle East’s tensions don’t end with Egypt. The energy market sector has to worry about Libya, which is incurring strikes by workers at its ports, and Iran is always a potential threat. While the new Iranian president, Hassan Rouhani, appears to be more moderate than the outgoing president, the country’s nuclear intentions remain unknown.
The Middle East is a powder keg and the entire energy market sector continues to watch for any additional sparks. Because the supply chain remains tight, I certainly wouldn’t bet on lower oil prices until the violence calms down and some sense of normalcy resumes. However, at the moment, that seems like it won’t occur anytime soon.
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