Oil price surge might be vulnerable and short-lived
Despite recent weakness in markets for risk assets amid fears of the Fed's QE tapering and disappointing growth in China, oil defied the trend and climbed 12 per cent to a 14-month high in the past month.
While the news might entice some investors into the trade in this commodity or in related energy stocks, I believe this rally could be short lived and the oil price at this level might not be sustainable.
The recent oil price surge has two main supports – the drop in US crude oil inventories and the political turmoil in Egypt that threatens oil shipping in the Suez Canal.
Last week’s 9.4-million-barrel drop in US crude oil stocks was due partly to the closure of two pipelines in Canada, which temporarily slowed crude oil flows to the US. An increase in gasoline demand during the summer driving season, which runs from late May to August, also helped draw crude oil stocks.
Despite the sharp decline last week, US crude stocks are still above the upper range of the average level for this time of year.
The problems with the two pipelines in Canada have also been resolved and the pipelines have been reopened, allowing more oil to fill depleted |stocks. So we are unlikely to see a significant inventory drop over the coming weeks.
Concerns mounted that tensions in Egypt could disrupt traffic through the Suez Canal. The canal is one of the world’s most important waterways and its Sumed Pipeline is considered a significant geographic oil transit point. Closing the canal would divert tankers around the Cape of Good Hope, adding 6,000 miles to the shipping route.
Over the last 50 years, the Suez Canal has been closed several times, either because of war or sabotage, but always due to tensions with Israel. Since its reopening in 1975 from a eight-year closure due to a war with Israel, it has never been closed for more than a day. Since the Egyptian revolution started in 2011, traffic in the Suez Canal has been not been interrupted. It is unlikely that the current political conflict will result in the closure of the canal.
In my view, both supporting factors for the oil rally are transient. And given the tepid global growth outlook and soft oil demand, I believe the price surge is not the start of a trend, but some evidence of the speculative nature of the commodities market
Komsorn Prakobphol is a senior investment strategist at Tisco Wealth. He can be reached via www.tiscowealth.com or [email protected].
