Oil remains the biggest trade — and perhaps the biggest risk for traders — as unrest in Egypt persists.
U.S oil prices climbed to over $90 a barrel in the electronic session Sunday night, extending Friday's 4% gain. March NYMEX crude futures rallied over $1.50 to a high of $90.87 in electronic trading. Brent crude nearly touched $100 a barrel, but rose less than $.50 from the previous close.
Oil prices have since pared their gains and volume is expected to be light until floor trading begins at the New York Mercantile Exchange at 9 a.m. ET Monday.
The volume of oil futures traded at the NYMEX exploded on Friday to an all-time high, according to some early reports. However, the exaggerated reaction to U.S. oil prices is surprising to some analysts.
Europe would likely be more exposed than U.S markets from any disruption to the Suez Canal or Suez-Mediterranean (Sumed) Pipeline -- Egypt's key routes for oil transit from the Red Sea to the Mediterranean. "Many Middle East crude prices use Brent as a guide, and seaborne Brent would suffer a much larger impact from a closure of the Suez Canal than would WTI," says MF Global energy analyst Tom Pawlicki. However, the volume on the London-based Intercontinental Exchange for Brent futures was not particularly high on Friday.
"European traders (who would be primarily exposed to a Suez disruption, but who are also more aware of the functioning of the Suez) were in lower panic mode than asset managers on Wall Street," explains energy analyst Olivier Jakob of Petromatix. "We read the surge in Nymex WTI volume combined with strong bidding on shares of oil-tanker companies as a rush from asset managers get exposure to an easily constructed worst-case scenario."
Traders will likely continue to play out that worst-case scenario in early trading this week. "Funds and investors may look to cover any short positions or change the composition of their portfolio based on these new geopolitical risk factors, thereby pushing commodities even higher and exacerbating price extremes," said trader John Netto, the founder of M3 Capital.
There is no immediate threat to oil supplies at this time. The Suez Canal and Sumed Pipeline -- which combined carry over 2 million barrels of oil a day -- are operating normally right now. Egyptian oil output currently stands at under 700,000 barrels a day. Even combined with production in other areas where there have been protests -- Tunisia, Yemen, and Jordan -- their total output is about one-tenth that of Saudi Arabia, the region's top oil producer. OPEC has plenty of spare capacity (about 5.8 million barrels a day) -- and the International Energy Agency could even consider releasing strategic reserves if needed -- to meet a supply disruption.
But a disruption in supply may not be the major catalyst for a big move in the price of oil. The main risk is not actual disruption of oil flows from Egypt, says Lawrence Eagles, head of commodity research at J.P Morgan. "It's the potential for these events to act as a catalyst to unrest in countries that are otherwise seen as stable," Eagles says. Uncertainty about the spread of the unrest could send oil prices significantly higher early this week.
Correction: An earlier version of this article incorrectly said volume was not particularly high on Friday on the Intercontinental Exchange for Brent or WTI futures. It should have said that volume was not high just for Brent futures.