Oil price spike could hurt stocks, economy

Oil price spike could hurt stocks, economy

The price of crude oil was trading above $102 a barrel Wednesday --

highest level in over a year — as embattled Egyptian President

Mohammed Morsi vowed not to yield to demands of millions of protesters

that he resign immediately.



The price of crude oil hit $102 a barrel, up 2.4% for the day. The

benchmark crude oil contract for August delivery traded on the New

York Mercantile Exchange gained $1.61 to close at $99.60 a barrel

Tuesday.



The political crisis in Egypt is not only causing heightened

uncertainty in markets, but it is also raising fears that oil prices

could spike if the crisis leads to a supply disruption if the

all-important Suez Canal suffers a blockage or bottleneck, says Don

Rissmiller, an economist at Strategas Research Partners.



"It is certainly fair to put the recent events in Egypt in the 'highly

uncertain' category," Rissmiller told clients in an early-morning

research note Wednesday.

While direct global economic impact of these events is not necessarily

large, "the secondary effects on energy markets and other countries in

the region is worth watching given the location of the Suez canal,"

Rissmiller adds.



So far, he adds, market impact looks relatively muted, in part because

the "Arab Spring" story is not as surprising as it was several years

ago. Broad political upheaval and street demonstrations in the summer

of 2011, dubbed the "Arab Spring," sparked market angst back then.



The stock market could start to suffer if a barrel of oil climbs above

$105 per barrel, warns Andrew Busch, editor and publisher of the Busch

Update newsletter.



"Oil spiking above $105 is problematic," Busch says, adding at those

elevated levels it starts to act as a tax on consumers and "hurt their

spending" on goods and services. Consumer spending accounts for

roughly 70% of economic activity.



The potential combination of rising oil prices and rising interest

rates simultaneously would be a further drag on economic growth. Crude

oil supplies in the U.S. fell last week, the government said

Wednesday. Supplies declined by 10.3 million barrels, or 2.6%, to

383.8 million barrels. That's just 0.2% above year-ago levels, the

Energy Department's Energy Information Administration said.



Scott Anderson, chief economist at Bank of the West, says the economy

can withstand a move above $100 a barrel, assuming it is above that

level for a short time. And, more important, any oil disruption would

cause an economic drain only if it translated into higher costs at the

gas pumps for U.S. consumers.



Anderson says that "$100 a barrel oil would be an unwelcome outcome

for U.S. consumers if we stayed above that level for awhile."



"We need to have had follow through with gas prices to cause major

problems. Gas prices have been better behaved then oil prices,"

Anderson adds.



Egypt's military has drawn up a plan to suspend the Islamist-backed

constitution, dissolve the Islamist-dominated legislature and set up

an interim administration headed by the country's chief justice if

Morsi fails to reach a solution with his opponents by the end of a

Wednesday deadline, Egypt's state news agency reported.

Morsi has rejected the ultimatum, and clashes between his supporters

and opponents have steadily intensified. Well over a dozen people were

killed in a single incident of fighting outside Cairo University on

Tuesday night.



Egypt is not an oil producer but its control of the Suez canal, one of

the world's busiest shipping lanes which links the Mediterranean with

the Red Sea, gives it a crucial role in maintaining global energy

supplies.



Around 2.5 million barrels of crude oil pass through the Suez Canal or

the SUMED pipeline each day, according to Capital Economics.



Despite the recent instability in Egypt, Julian Jessop, an analyst at

Capital Economics, says he is sticking with his call that oil prices

will finish 2013 below $100 a barrel.



His market call is based on his belief that global demand will remain

sluggish due to a weak global economy, oil supplies will remain ample,

and Middle East worries will fade once again.



Even if oil supplies from the region were threatened due to

Egypt-related causes, Jessop stresses that "any fall-out for global

oil markets to be more than offset by releases from the vast strategic

reserves held by the U.S. and its allies."