London: Oil hovered above $100 on Tuesday as the market assessed the risk of Egypt’s social unrest spreading to neighbouring Opec members, but stayed below yesterday’s high of $101 on lower factory growth in China.
Analysts and traders agreed that the popular uprising against the Egyptian government was unlikely to disrupt tanker movement and oil flows along the strategic Suez canal and Sumed pipeline, but said that the restive mood in the region will support prices.
“Even if the worst case scenario of a complete halt of traffic through the crucial link materialises, the global surplus in shipping capacity would allow a switch to the longer haul journey around southern Africa without too much of a headache,” JBC Energy said in a research note.
“However, there appears to be a substantial risk that events could spread to other countries in the region,” the report said.
The unrest in Egypt comes on the heels of an uprising in Tunisia that toppled the country’s president and is keeping global investors and traders on the lookout for any signs of copycat unrest in neighbouring Opec producer Algeria.
Brent crude for March slid 48 cents to $100.54 a barrel as of 3:36pm, after topping $100 for the first time since October 2008 on Monday, when prices touched an intraday high of $101.73. US crude shed 10 cents to $92.09.
The International Energy Agency said on Tuesday that the oil market does not face any emergency, but called on Opec to remain “flexible” in the event that contagion does spread and shortages begin to show.
But many traders said that perceived risk, while unsupported by any evidence of a direct threat to ships passing through the strategic Suez canal connecting the Red Sea with the Mediterranean, could lead to further rises.
“$100 is not a final target for Brent,” said Tetsu Emori, a fund manager at Tokyo-based Astmax Co Ltd.
“$110 and $115 could be reached by the end of the year. People now have to take geopolitics into consideration. Even if nothing happens in Egypt, it allows investors to take on additional risk and develop long positions in the hope of making more money.”
Egypt’s anti-government protesters, sensing victory after President Hosni Mubarak agreed to discuss sweeping political reforms, rallied support for what they hope will be a million-strong march for democracy on Tuesday.
Mubarak’s newly appointed vice-president began talks with opposition figures and the army declared the protesters’ demands “legitimate” and said it would hold its fire.
“While short-term risks remain skewed to the upside, we think that the current price strength is likely to ease once the situation in Egypt normalises. Spare OPEC production capacity remains ample, which should prevent a rapid tightening of the market balance,” said analysts from Credit Suisse.
The Organization of the Petroleum Exporting Countries says it holds about 6 million barrels per day (bpd) of idle production capacity - equal to 7% of world demand -- that it could tap to fill any shortage. Most of this capacity is held by Saudi Arabia.
Opec is concerned by unrest in Egypt but sees no need for an immediate boost in its output.
While Egypt’s social upheaval kept Brent crude firmly above $100, China’s factory growth slowed to a five-month low, signalling demand may not rise as quickly in the world’s second-largest oil user.
US crude inventories likely rose 2.8 million barrels last week on higher imports, while colder weather drew down distillate stockpiles by 1.2 million barrels, a Reuters poll of analysts showed.
The industry-funded American Petroleum Institute will issue its weekly data on US oil inventories on Tuesday, followed by the government’s Energy Information Administration report on Wednesday.