Pirates of the Gulf of Aden and Unrest in Egypt

Brent crude oil traded higher this past week, supported by geopolitical tensions and minor supply disruptions. Greek and Italian tankers were hijacked around the Gulf of Aden and continuing concerns about the situation in Egypt saw Brent crude trade from lows around $97.51/bl to current levels above $100/bl.

WTI, however, traded in reverse fashion from highs around $89.54/bl to current levels around $87.63/bl on record Cushing inventories from a week ago. The most recent inventories release saw crude stockpiles rise by about 1.9M barrels while Cushing inventories retreated from record levels by -927k barrels.



Brent Crude – WTI spreads likely to remain wide

The Brent – WTI crude oil spread widened to highs around 14 before tightening back to 12.50 in Thursday trading. With Brent considered to be the global benchmark compared to WTI’s more regional focus, we think spread widths may remain high in the near term. Although Cushing inventories reversed this past week, they remain at lofty levels and may continue to weigh on WTI. Brent crude oil, however, is likely to be supported by unrest in Egypt which could see spread widths revisit the 14 highs.

Mubarak - Adding fuel to the fire

Mubarak’s prepared statement today was expected to calm tensions in Egypt as rumors of his resignation were rampant prior to delivery. However, the speech had the opposite effect as Mubarak defiantly stated his intentions to stay in office until September while shifting authority to VP Suleiman for the time being. Protesters were told to ‘go home’ and turn off ‘satellites’ but such comments were not heeded. This has paved the way for a protest of historic proportions in the coming days as well as the possibility for a military coup. Any increase in unrest or violence in Egypt is likely to see a concurrent rise in both WTI and Brent crude oil prices.

Technically Speaking

Technically, WTI crude oil sees significant support into the 55-day sma around 86.25. The moving average has contained downside on numerous occasions in 2011 and may be the key pivot to WTI’s upside reversal. Brent crude oil is likely to find support into 97.00 on any downside although prices may try the recent 103.35/40 highs before a test of support.

Expectations for some sort of resolution in Egypt were met instead by further complications. We think the coming days are likely to see intensified chaos in Egypt have a spillover effect to other Middle Eastern oil producing nations. Accordingly, we think continued geopolitical risks are likely to keep both WTI and Brent crude oil prices supported for a re-test of their respective 2011 highs.

Source: FOREX.com

11.02.2011