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Changing Middle-East Dynamics a Game Changer for Oil?

A political crisis in Egypt heralds a new phase of instability in the Middle East that will keep worries about oil supplies from the region intact putting upward pressure on prices, commodities analysts said.

Changing Middle-East Dynamics a Game Changer for Oil?
AFP | Getty Images

A controversial decree by Egypt's President Mohamed Mursi has plunged the country into a crisis and ensured that tensions in the Middle East will remain firmly in focus just as last week's ceasefire between Israel and Hamas ended eight days of fighting in the Gaza strip and bought some relief to investors.

On Wednesday, hundreds of protests in Egypt's capital city, Cairo, gathered for a sixth day to demand Mursi revoke a decree that gives him excessive powers. Some hardline parties, meanwhile, are expected to hold protests on Saturday across the country to support Mursi, Reuters reported.

"The tensions in the Middle East should drive (oil) prices higher," David McAlvany, CEO of McAlvany Financial Group, a precious-metal brokerage based in California, told CNBC Asia's "Squawk Box."

"What we're seeing in Egypt is a long-term issue and a new stage of instability, one that goes beyond Egypt," he said. "We used to have predictability in the Middle East with relationships that went back decades. We don't have that anymore and that makes events even more volatile because you don't know how key players will act."

Brent crude futures closed lower on Wednesday for a third straight day at $109.51 a barrel, while U.S. crude oil futures traded around $86.65 a barrel in early Asia trade Thursday.

Analysts said they are watching developments in Egypt as well as further violence in Syria closely for signs of growing risks to oil exports from the region, which supplies a third of the world's oil.

"Oil production from Egypt is not that significant but developments there are watched closely because of fears about contagion and because of Egypt's ability to control one of the major routes for oil, the Suez," said Nick Trevethan, senior commodities strategist at ANZ Research.

Some commodities analysts expect concerns about the Middle East to help push U.S. oil prices above $90 in the short-term, a 4 percent gain from current levels.

(Read More: Middle East Woes Likely to Underpin Oil Prices: Survey)

"We expect to see oil prices higher broadly with stronger gains in the first few months of next years, in part-related to political risk," said Trevethan, adding that parliamentary elections in Israel, scheduled for January 22, would be watched closely by energy markets.

Growing Concern

In addition to Egypt and Syria, there were other sources of concern such as any renewed fighting between Israel and Hamas.

In a sign that growing concern about instability in the Middle East is now damaging sentiment more broadly, Alex Thursby, CEO, international and institutional banking at ANZ Bank, identified the Middle East as his biggest concern.

"Clearly if there is military action in the Middle East and it is aggressive, that puts the world in a difficult position and this would bring a lot of volatility and very quickly," he told CNBC on Thursday.

Ric Spooner, chief market analyst at CMC Markets in Sydney, said he expected oil prices to remain in a tight range around $110 for Brent futures, with a moderate outlook for oil demand globally putting downward pressure on oil prices.

He added that oil markets have to price in a risk premium when it comes to the Middle East and so the key now was to see how developments unfold.

"There is that scenario where we could get large supplies of oil withdrawn from the market, so a risk premium regarding the Middle East is always built into the market," he said. "Right now, I would be more concerned about the downside risks to oil prices, but if we get a significant escalation in the Middle East, the risk of oil prices moving up higher, quickly, is large."

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