Egypt, Oil Prices, and You

Late last week, we saw the price of Brent crude oil soar to its highest level in four months, as it flirted with the $111.00 / barrel handle.

Brent Crude Oil Daily Chart

The spike in price happened after Egypt’s government declared a “state of emergency” after violent clashes took place between the local police and supporters of ousted President Mohamed Mursi.

Keep in mind that while Egypt isn’t considered one of the world’s top oil suppliers (ranked just 54th in the world, producing less than 1% of world supply), its location makes the country a key figure in the oil industry.

There are concerns that unrest in Egypt could adversely affect the Suez Canal, where up to 7% of total oil supply passes through every single day. Should conflicts continue to rise in Egypt, it could cause disruptions in the Suez Canal, which will lead to increased transit time and rising shipping costs.

For now though, the upward pressure on oil prices is just mostly based on fear and an actual drop in oil supply hasn’t taken place yet. Analysts are even predicting that an oil supply disruption is unlikely as BP and Royal Dutch Shell, two of the world’s largest oil producers, have assured that their operations and production will carry on.

Oil producers have also announced that they are monitoring the current situation very carefully, and that means you should keep tabs on what’s going on too! As we have witnessed in the past, market sentiment can be very fickle and commodity prices can react on oil supply fears, whether rational or irrational.

As forex traders, the good news is that we can profit from all this! In our School of Pipsology lesson on Intermarket Correlations, we discussed how the Canadian dollar has a positive correlation with oil prices since Canada is one of the top oil producers in the world.

Take a look at this daily chart of USD/CAD for instance. The pair has been on a solid uptrend since September 2012, but it appears that it is trying to breach the rising trend line.

USD/CAD Daily Chart

Further pressure on oil prices brought about by a potential drop in supply could eventually trigger a strong break below USD/CAD’s rising trend line, which might signal the start of a long-term downtrend. Do you think that’s bound to happen soon? Let us know by voting through the poll below!