This week Brent oil breached $111 a barrel. A four month high on supply fears throughout the Middle East. Sentiment or more accurately fear has driven the latest rally. Fear of supply disruptions both at source as well as supply routes.
With the latest wave of Egyptian protests, concerns over the strategic Suez Canal shipping route were raised. “Disruptions at the Suez Canal are unlikely, but markets never move on what’s likely. They move on fear. If people are fearful about supply, they buy even if the market is fundamentally well supplied,” Michael Hewson, an analyst at CMC Markets, said.
Other factors include supply disruptions. The International Energy Agency stated that production in Libya had dropped to just 400,000 barrels a day, a 60% decrease from an output of 1 million barrels a day in July. A significant drop from the 1.6million barrels a day over a year ago. In Iraq, output is likely to be cut by 500,000 barrels a day due to scheduled maintenance. The downtime is expected to range from four to six months commencing in the upcoming weeks, however this is unlikely to disrupt export volumes. “Our export capacity from the south is now surpassing our oil production,” Faisal Khalaf Wadi, deputy head of Iraq’s largest state oil firm, the South Oil Co. said.
Lastly US oil inventories showed a decline of 2.8 million barrels, more than the drop of 1.5 million barrels expected by Dow Jones Newswires. Should the U.S. Federal Reserve pull back on further stimulus packages, this will cause oil prices to rally further.