Tuesday Outlook: New Protests In Egypt May Fuel Oil Rally

Tuesday's "million" person march in Egypt could keep the heat on oil prices, which have gushed nearly 8 percent in two sessions.

Protestors hold an anti-President Hosni Mubarek sign in Tahrir Square during afternoon anti-government protests in central Cairo, Egypt.
Getty Images
Protestors hold an anti-President Hosni Mubarek sign in Tahrir Square during afternoon anti-government protests in central Cairo, Egypt.

Other financial markets Monday ignored the unrest in Egypt after reacting sharply Friday, as uncertainty increased ahead of the weekend and nervous traders repositioned.

So Goes January?

Stocks ended January on an up note, with the Dow up 2.7 percent for its best January since 1997. For those who believe the old adage, a good January foreshadows a good year for stocks.

The S&P 500 gained 2.3 percent, its best January since 2006 and the Nasdaq gained 1.8 percent, its best since 2007. The Dow Monday rose 68 to 11,891, and the S&P 500 rose 9 to 1286. The day's top sector was energy, up 2.5 percent on rising oil prices and Exxon Mobil's strong earnings report.

The dollar Monday was down 0.6 percent against the euro (1.3692) and was down more than 2.3 percent for the month. However, it gained more than 1 percent against the yen for the month and was barely changed Monday. Treasury prices declined Monday, driving rates higher. The 10-year was yielding 3.38 percent.

"Egypt is putting anxiety back into the oil price, and it will be there at least until there is clarity about a transition out of the current turmoil." -Chairman, CERA, Dan Yergin

"I think it will be a better bid market" Tuesday, said Jefferies Treasury strategist John Spinello. "We have reasons to be better bid. No supply and the Fed buying for five days.

"I think with tomorrow's march (in Egypt), if things get a little unruly we'll be better bid. The street is of the mind set to be long to sell, rather than long for a long ride," he said.

Investors will also be watching ISM manufacturing data and construction spending at 10 a.m. Tuesday. Auto sales for January are released throughout the day, and there are a number of major earnings before the bell. BP , Pfizer , UPS , Biogen Idec, Archer Daniels Midland, McGraw-Hill and Cummins report. After the bell, Boston Scientific , Broadcom , Electronic Arts , and Aflac report.

Oil Drill

Nymex crude jumped about 3.2 percent Monday to $92.19 per barrel, its first close above $92 since October, 2008.

"Based on the technicals and having touched that number (92), it looks poised to go higher," said John Kilduff of Again Capital.

Paramount Options President Raymond Carbone said U.S. West Texas Intermediate crude, traded at Nymex was following Brent crude higher. Brent hit $100 Monday. "People were short the WTI and long Brent," he said, noting the spread is narrowing between the two as WTI moves higher. "It narrowed today, and it narrowed a couple of dollars Friday. It's the unwinding of a trade that was on anyway," he said.

He said oil could continue to move higher. "It doesn't look like there's going to be any sort of calm coming to the situation any time soon. It depends on the photos you see from that march. If it's nice and peaceful, it'll be one thing. If the tear gas is flying, it'll be another thing," he said.

Kilduff said oil got a boost Monday when the Egyptian military said it would not use force on the protesters. "That seems to bring a new level of uncertainty about what's going going on in terms of transition," he said. "Clearly of all the asset classes, oil is the most sensitive to this uncertainty."

Oil markets at risk

Protesters have been calling for the resignation of long time President Hosni Mubarak in demonstrations that have gotten larger and move violent since they started last Tuesday. Mubarak Friday declared he remained in charge of the government and said he was firing his cabinet. His newly named vice president, Omar Suleiman said on state television Monday that he was asked to begin discussions with the opposition. Mohamed ElBaradei, former UN nuclear chief, has won the support of the Muslim Brotherhood and other opposition to represent their side.

"The reality is a lot of people see him (ElBaradei) as opportunistic. 'The guy didn't live here. He doesn't understand us.' He doesn't really represent that many Egyptians. He's got a seat at the table. He'll be part of any post Mubarak world, but I don't know how sustainable that would be," said Nomura's Ann Wyman, a Middle East and Africa expert who heads Emerging Markets Research, Europe.

Egypt is not a major oil producer, but traders said fear of contagion spreading to other oil producing countries in the region has helped spark the run in oil prices. Prices have also move higher on concerns the protesters could interfere with the Suez Canal or SUMED pipeline, which when combined carried a little more than 3 percent of the world's oil supply in 2009.

"Egypt is putting anxiety back into the oil price, and it will be there at least until there is clarity about a transition out of the current turmoil. The turmoil’s most immediate impact on the world oil market would come from Egypt’s role as a major transit point for Persian Gulf oil, via the Suez Canal and the SUMED pipeline. The larger anxiety is about the impact in the region that provides so much of the world’s oil," CERA chairman Dan Yergin wrote in a quick note.

Will there be a change in the region’s geostrategic balance, of which Egypt is a bulwark? The biggest concern, from the oil market point of view, is in terms of contagion. The entire Arab world is watching the events unfold in Egypt, and the outcome, whatever it will be, will resonate throughout the region—both for populations and for governments. Events will determine how high anxiety drives the price," he wrote.

Egypt's stock market has been closed and will likely remain closed for some time, Wyman said, noting that Tunisia's market has been closed since protesters toppled the government there.

She said a concern for that market is that much of the market's capitalization is from the banking industry, and banks have been closed during the protests. "While they claim to have a lot of liquidity like they did before the crisis started, you have to ask yourself what's going to happen when they reopen, and people start to trying to pull out deposits," she said.

"I think for now there is going to be hesitation to putting more money to work in Middle East markets. Right now, there is just discomfort with the whole region," she said. "Later, some differentiation will be made." Some of the markets that would be more attractive include Dubai, Kuwait, and Abu Dhabi.

"We are just reevaluating political risk across the whole region and how it shakes out. I just think that people want to stand back at a distance right now," she said.