Civil war in Libya. A regime change in Egypt. Growing unrest in Bahrain and Yemen. Protests in Iran. And growing anxiety over the contagion of civil uprising in places like Saudi Arabia (which saw protests on Thursday and more are scheduled for March 11th) have all pushed oil prices to their highest levels since September 2008.
Oil prices – defined as U.S. light, sweet crude for April delivery, priced on the New York Mercantile Exchange – settled at $104.42 on Friday, up $2.51 or +2.46%. This was the highest close since September 26, 2008. And for the week, Nymex crude gained an impressive $6.54 or +6.7% (this after the gain of +13.5% seen the week prior).
At least part of the reason behind crude’s rude rise is the price action itself. Hedge funds and other fast-money types have begun to pile into what appears to be a burgeoning uptrend in the oil charts (take a peek at a weekly chart of USO and you’ll see what we mean). Then when you couple the price action with the news backdrop, this appears to be the new place to be for the ‘hot money.’
How high can oil go? This is always an interesting question when a new trend emerges in the commodity markets. While Saudi Arabia has already opened up the spigot to increase the flow of oil in an attempt to ensure there are no shortages and has promised to do more, traders appear to be adding to the “risk premium” current being applied to the price of oil. One glance at the headlines makes this concept easy to understand.
"Tension in the Middle East is like a runaway train," said Michael Hewson, an analyst at CMC Markets in London. Hewson told CNBC on Friday, "Once it starts, it's very difficult to stop. And if there is a danger that it impacts the supply chain, people will understandably get nervous."
With the economic rebound in the U.S. having only recently reached what many consider sustainable levels and job growth looking like it may be starting to pick up, the threat of another shock to the system has the powers that be in Washington more than a little concerned. The bottom line is the U.S. can ill afford an oil induced slowdown at this stage of the game.
It is for this reason that the White House appears to be attempting to talk down the price of crude by referencing its 800 billion gallon reserve of oil on Sunday. Speaking on NBC’s “Meet the Press,” White House Chief of Staff William Daley said that the Obama administration was talking about tapping the U.S. strategic oil reserve.
Daley said on the Sunday program, "We are looking at the options. The issue of the reserves is one we are considering. It is something that only is done—and has been done—in very rare occasions. There's a bunch of factors that have to be looked at. And it is just not the price."
"All matters have to be on the table when you see the difficulty coming out of this economic crisis we're in and the fragility," Daley added.
Daley’s comments likely reference the growing cries from Congressmen to do something. Reuters reports that Congress has been pressuring the White House to take action in order to calm the public’s fear about escalating gasoline prices.
Senator Jay Rockefeller on Thursday became the third Democrat to ask President Barack Obama to tap America's emergency oil supply to ease pressure on prices.
In a letter to Obama, Rockefeller said a "limited draw-down" from the nation's 727-million-barrel Strategic Petroleum Reserve "can protect our national security by preventing or reducing the adverse impact of an oil shortage."
Over the past four years, the U.S. consumer has learned to deal with fluctuating gas prices. However, the analysts we spoke with believe there is a line in the sand that may cause the public to pull back on their discretionary purchase. The key level appears to be $4 per gallon for gasoline, a level that is being quickly approached in some areas of the country.
On Thursday, U.S. Treasury Secretary Timothy Geithner also attempted to talk down the issue of oil supply in his testimony before a congressional hearing.
Geithner said there was "considerable" spare oil production capacity around the world and that there are "substantial" reserves on hand.
"If necessary, those reserves could be mobilized to help mitigate the effect of a severe, sustained supply disruption," Geithner told the U.S. Senate Foreign Relations Committee.
The problem with the concept of tapping the strategic reserves is that it is an option that has been rarely used. Historically, the U.S. has only turned to the strategic reserves during times of emergency or when faced with a major supply disruption. The last time the reserve was used was in 2005 following Hurricanes Katrina and Rita.
However it should be noted that the move was successful as oil prices fell considerably as Reuters estimates that crude fell about 9% following the move in 2005.
But it is also important to recognize that the current oil crisis is far different than the brief problem created by the hurricanes in 2005. Instead of a definable interruption in the flow of gasoline and other oil byproducts, oil traders are currently dealing with the fear of the unknown in the Middle East and Northern Africa (MENA). And while disruptions from Libya are one thing, problems in places like Iran and Saudi Arabia are another story entirely.
With just about every photo from MENA currently showing soldiers and rebels firing explosive devices at one another, one has to wonder what the impact of the U.S. tapping its reserve might be. Given the uncertainty and the corresponding “risk premium” being applied to oil right now, an argument can be made that any relief might prove temporary.
However, for investors in the stock market, even temporary relief would likely be welcomed.
By. David D. Moenning of TopStockPortfolios.com