How Egypt’s Turmoil Affects Crude Oil Prices (USO, OIL, DBO, UCO, SCO, OIH)

When I first started writing for Taipan Publishing Group, my newsletter was dedicated to commodities and commodity-based companies: gold, corn, uranium, miners, refiners, drillers, alternative energy… I covered it all.

Needless to say, a lot of my research was on oil and energy. This was back in the day when crude oil prices hadn’t yet hit $50 a barrel, but were headed there, and boosting energy companies higher and higher.

It got me a regular spot on CNBC’s Squawk Box every Monday morning.

And boy, is oil jumping now.

Sad to say that much of the movement in crude oil prices is because of the ongoing civil unrest in Egypt.

Now, some see crisis as opportunity, so let’s break down the factors and see if you should bite on this chance at crude oil profits.

The Situation in Egypt

The massive protests in Egypt are calling for President Mubarak to leave office, after 30 years of rule. The people say under his rule, the needs of the poor have been ignored, and corruption has flourished.

Hundreds of thousands of protestors have been organizing and demonstrating in the streets, and the situation is extremely tense, even though the military has said it would not fire on protestors.

Here’s why Egypt is important… and it’s not because it’s a major crude oil producer. It produces less than 681,000 barrels a day — less than India or Azerbaijan. And it’s not that the U.S. is a major importer of that oil either.

Indeed, the United States receives less than 3% of Egypt’s crude oil production.

(Natural gas from Egypt, by the way, makes up less than 1% of our imports.)

So why have these protests had such an effect on the price of crude oil? Jared told you on Tuesday that crude oil prices climbed from $85 to $92 in two days on the news.

It’s because of a long history that would take more space than I have here to tell. Let me sum up… quickly.

Egypt: The Peacemaker?

In the early to mid-20th century, Egypt was the undisputed leader of the Arab world. This was before there were many oil-producing countries in the Middle East, and certainly before any of them had control over their own resources.

But just about the time when some countries were raking in royalties from oil production (operated by a select group of international companies), the state of Israel was created, and Arab nations looked to Egypt to confront the expansion into other Arab states, like Palestine, Jordan and Syria.

This was the prelude to several major conflicts between Egypt and Israel (and other Arab nations), and an expression of the continuous struggle between the United States and the Soviet Union.

That’s an even longer story, of course. But what happened was that Egypt was walloped by Israel, and more or less decided to throw in the towel when it came to confronting Israel’s existence.

This is an oversimplification, I realize, but for the sake of space, the main point I want to convey is that Egypt became a less hostile voice in the Middle East. While other Arab nations continue with anti-Israel rhetoric and actions, Egypt stepped into the role of peacemaker, and was often involved in negotiations between Israel and countries like Lebanon and Syria for prisoner exchanges.

In other words, these protests could result in a leader who will choose not to continue being the peacemaker. That is certainly not in the best interests of the United States, according to current foreign policy.

Further Destabilization

Another issue at hand is that this unrest could spark other protests in the Middle East. In fact, Jordan’s King Abdullah II fired his government after small protests, and elections in Palestine’s West Bank are now promised.

The Middle East is still the world’s main “watering hole” when it comes to oil. The fear of more government changes and uncertainty has levered crude oil prices back above $90 a barrel.

Another thing that has people concerned is the Suez Canal. Back during its conflicts with Israel, Egypt used the canal as an economic weapon.

Massive amounts of trade — including oil — flow through the canal. If this were to be closed, there would be an immediate response, not only in the price of crude oil, but in militaries. It would be a huge disaster that would erupt in more destabilization.

What does this mean for investors?

Crude Oil Prices Put in a Bottom

Oil’s drop down to $85 was a test of its immediate-term uptrend. The rebound was quite convincing, however, there will be strong resistance should crude oil prices try to push through $93 or $94… barring any specific impact to oil trade or production in the Middle East.

Resistance may be due to oversupply right now. According to the Department of Energy, the U.S. has 14.2 million barrels more than last year in its inventories.

That said, prices are more than $16.50 higher than they were last year, and that could provide some momentum to at least test that resistance.

Should you jump in?

The charts say, “Not yet.”

Oil futures
View larger chart

This represents oil futures for March 2011. The purple lines indicate a possible broadening descending wedge formation, which I showed you in an agricultural ETF back in mid-January.

As you can see, its bounce at about $85 sent it back up to the top line of the formation. I’ve marked a possible support point in green at about $90 a barrel, and a possible resistance point in red at just under $94.

That’s really tight movement, and crude oil prices could ricochet between these lines without offering any real direction.

I think this is reflected in what’s happening in Egypt right now. Because supply has not been disrupted, crude oil prices have not broken above $94… But because there is still the threat of disruption should more countries experience protests and demonstrations, crude oil prices have a certain buoyancy.

Should crude oil prices break higher out of the broadening descending wedge formation, expect a pullback from $94 to retest that top line at $91. A bounce from there could be a chance for investors to play oil.

ETF Daily News Notes Some Related Oil ETFs: United States Oil ETF (NYSE:USO), iPath S&P GSCI Crude Oil (NYSE:OIL), PowerShares DB Oil (NYSE:DBO), ProShares Ultra DJ-UBS Crude (NYSE:UCO), ProShares UltraShort DJ-UBS (NYSE:SCO), Oil Services HOLDRs (NYSE:OIH).

Written By Sara Nunnally For The Taipan Publishing Group

As Senior Research Director, global correspondent and co-editor of Smart Investing Daily, Sara has traveled all over the world in search of the best investment opportunities to recommend to her readers, be they in developed economies like France and Italy, in emerging markets like the Czech Republic and Poland, or in frontier terrain like Vietnam and Morocco. Her unique “holistic” approach of boots-on-the-ground research has given her an edge in today’s financial marketplace as she searches for the next investment opportunities in hot sectors like alternative energy, currency markets and commodities.  Sara Nunnally’s diverse background includes studies in history, computer science, literature and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, Bloomberg and CNBC’s Squawk Box, as well as numerous radio shows around the country.

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