Since the end of last year the amount of net length held by money managers in the NYMEX WTI crude oil market dropped from a record 202,221 contracts to 155,487 as of last Tuesday.
Not surprisingly, in the midst of this liquidation of speculative money, oil for March delivery dropped from a high of $93.46 on January 12th to $85.11 last Friday morning; a peak-to-trough decline of 9%. However, as video of the anarchy in Egypt began to stream across trading floors Friday morning, oil began to rise, from around $85.50 at 8:30 a.m. EST to $89.73 just 3½ hours later. By the time the dust had settled the contract finished with a gain of $3.70 a barrel or 4.3%. This gain was the 32nd largest since 1983 (nearly 7,000 sessions) on an arithmetic scale and the 213th largest on a ratio scale (97th percentile).
Today’s issue of The Schork Reporthighlights the unmistakable concern of contagion. If what started out as mass protests in tiny Tunisia (population 10.5 million) can incite the civil strife to the degree to which is occurring in the largest Arab country on the globe, Egypt (population 80.5 million), then what is the risk to oil should this chaos metastasize to a major oil producer on the African continent or in the Middle East?
Even without that scenario playing out, the risks are still high as Egypt plays a key role in the global oil markets. The most important factor is the flow of oil through the Suez Canal and the Suez-Mediterranean Pipeline (SUMED). Both of these points are major conduits for Persian Gulf oil to transit in to the Mediterranean towards markets in Europe and North America.
The EIA estimates that in 2008 (the year prior to the demand destruction wrought by the global recession) approximately 1.6 MMbbl/d of oil and refined products were shipped on tankers through the Suez Canal. Additionally, the SUMED pipeline can ship approximately 2½ MMbbl/d of crude oil from the Egyptian port of Ain Sukhna on the Gulf of Suez to Sidi Kerir on the Mediterranean.
Should the rioting that is taking place now disrupt the flow of oil through the Suez and the SUMED, then around 3 MMbbl/d of oil will have to be diverted 6,000 miles around the Cape of Good Hope, South Africa. Thus, with speculators already demonstrating their willingness and ability to buy over 200 MMbbls in the New York futures market, things are about to get interesting.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.