Egypt risk premium built-in, limiting oil’s gain
Benchmark global oil markets may already fully reflect the risk of political instability worsening in Egypt and the spill-over effects on the broader region, implying further oil price gains may be limited in scope this week, traders and analysts told CNBC.
"Supply-side constraints and politically-related ones…I always regard as fleeting supports for the price," Tom Price, Global Commodity Analyst at UBS told CNBC's 'Squawk Box' on Wednesday.
Oil prices are still likely to drift higher this week, CNBC's weekly sentiment survey showed, though fundamental investors may try to blunt the advance believing current prices don't reflect well-supplied markets and a slowdown in major emerging market consumers such as China.
"There is still too much oil," said Thomas McMahon, Director of the Pan Asia Clearing Enterprise and former chief executive officer of the Singapore Mercantile Exchange. "But cheap dollars, technical disconnect and Egypt seems to be sweeping this aside. Common sense and supply demand will prevail but maybe not this week."
(Read more: Rising oil prices: Is it really all about Egypt?)
Both Brent crude and U.S. oil futures ended higher for the sixth straight session on Friday, with Brent posting its biggest weekly percentage gain in six weeks as turmoil in Egypt and Libya stoked worries about oil supply security, Reuters reported.
Brent crude oil futures for October delivery finished Friday 80 cents higher at $110.40 a barrel. Brent gained 2 percent on the week, its largest weekly percentage gain since the week to July 5.
U.S. crude oil for September delivery settled 13 cents higher at $107.46, after trading as high as $108.17. U.S. oil futures ended 1.4 percent higher on the week.
CNBC's weekly sentiment survey showed 70 percent, or fourteen out of 20 respondents, believe prices will gain this week. A quarter, or five out of 20, say prices will fall while one expects the market to trade at around current levels.
"Some risk premium has been built into markets for the situation in Egypt," said Ric Spooner, Chief Market Strategist at CMC Markets in Sydney, who expects prices to fall this week. "However, further upside from this source is limited unless the market gets more tangible evidence that Suez may be disrupted."
The Suez Canal, a critical sea route for 4.5 percent of global oil supplies linking the Red Sea with the Mediterranean, remains open as does the Suez-Mediterranean (Sumed) oil pipeline.
(Read more: Suez canal, Egypt's economic lifeline, stays open)
Tom Weber, Senior Commodity Advisor at Portfolio Managers Inc., said though a Suez closure is a "remote possibility – barring a marked loss of military control, it makes a great bullish headline."
Weber added: "Bahrain shows some unrest and I think most oil traders' conclusion is that there will be no scenario where Iran backs off their nuclear program."
Despite crushing the 2011 uprising, Bahrain, home to the U.S. Fifth Fleet, remains a focus of a battle for regional influence between Shi'ite Iran and Sunni Saudi Arabia, Reuters reported.
Majority Shi'ite Muslims have been demanding more democratic reform from the ruling Sunni al-Khalifa family for two-and-a-half years.
Driven by "Tamarrod" (Rebellion), a loose association of opposition activist groups which coalesced in early July, dozens of rallies were held last week across the country, Reuters reported on Sunday.
"Unrest in Bahrain worries me," said David Kotok, Chief Investment Officer at U.S. money manager Cumberland Advisors, with $2.3 billion assets under management.
Arguably more so than Egypt and Bahrain, bullish respondents point to a crippling oil workers' strike in Libya as price-supportive.
Libya is threatening to use military force to bring order to its oil sector, where a strike by guards – now in its third week - has dealt a heavy blow to its fragile post-revolution economy, Agence France-Presse reported on Monday.
Oil exports plunged by more than 70 percent at the end of July after guards, including rebels who helped topple dictator Muammar Gaddafi two years ago, forced terminals to shut, AFP reported.
"All eyes are on Libya," said David Nevin, an energy broker at Xconnect Trading Ltd. in London. "A reopening of the ports there should see some long liquidation."
From a technical perspective, both U.S. futures and Brent are heading towards some key upside levels and may encounter resistance, survey respondents said.
"WTI (West Texas Intermediate, the oil grade underpinning the U.S. crude futures contract) is within a trend channel with resistance around $108/$108.50," CMC Markets' Spooner said. He added WTI will struggle to break those levels "with overall inventory and production levels relatively high and given the possibility of U.S. dollar strength on (Fed) taper concerns."
Xconnect Trading's Nevin said that while the market is admittedly "overbought" in the short term, further gains may not be entirely ruled out. "We remain cautious at these high numbers. With the market overly long, a turnaround will be vicious."
Technically, the market broke Nevin's initial Brent target of $110.30 and $110.64 represents the next hurdle that needs to be cleared to open the way to $111.20 and beyond, he said, recommending buying the dips on the Brent-WTI spread. "The market feels like a bubble at the moment and is overly long in my opinion," he said.
(Read more: Terror fears draw buyers of crude oil)
For WTI, the September crude oil contract expires this Tuesday, spelling volatility ahead in the front-end of the futures market, said David Greenberg of Greenberg Capital LLC.
"Sept. Crude goes off the board Tuesday," Greenberg said on Twitter. Expect "low volume in the contract" and prices that "can be pushed around on air." The October contract, the more actively traded contract on Friday, settled 10 cents higher at $107.29.