Oil off 14-month low as Suez Canal concern eases, QE outloook

Oil dropped during the late European and early U.S. session after an Egyptian official said the state-controlled Suez Canal is secure and ship traffic is normal. Meanwhile, positive U.S. economic data that was initially bullish for oil reinforced Feds view into tapering its bond purchasing program this year, which according to some analysts will be announced at the September FOMC meeting.

On the New York Mercantile Exchange, WTI crude for August delivery dropped 0.41% on the day after reaching a 14-month high during the Asian session. The American benchmark stood at $102.79 per barrel at 14:33 GMT and held in range between days high and low of $103.98 and $102.14 respectively.

Meanwhile on the ICE Futures Exchange, Brent oil August futures dropped below $108 per barrel to trade at $107.14 at 14:34 GMT, marking a 0.54% daily decline. The European benchmark varied between days high and low of $108.03 and $106.81 per barrel respectively.

Oil prices edged higher as concern over shipments and flows through the Suez Canal and the Suez-Mediterranean Pipeline threatened global supply. After last Wednesday Egypts now ex-president Mohammed Mursi was forced from power by Egypts army, clashes between supporting protesters and Egyptian security forces left at least 40 people dead on Monday. Egypt controls the Suez Canal and the SUMED, through which combined 2.24 million barrels of oil get transported from the Middle East to Europe.

Dominick Chirichella of Energy Management Institute said for Reuters: “Although Egypt is not an oil producer, the situation in Egypt could spread to other regions of the Middle East where a significant amount of oil is exported to the consuming world.”

Standard Bank said in a research note: “It is Egypts position as a major transit point for global crude oil movements that explains the current concern and geopolitical risk premium assigned to the goings on in that country.”

However, an official eased the situation by saying the canal is secure and ship traffic is normal. Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said for Bloomberg: “Traffic on the Suez Canal has been unaffected by the unrest in Egypt. There’s relief that the traffic is still moving. There won’t be a major fall in prices because the situation could spiral out of control at any moment and threaten the flow of oil.”

Meanwhile, positive U.S. data from last week still supported oil on the demand side. However, speculation over Fed reducing its monetary stimulus is limiting gains and will weigh on prices when the geopolitical risk premium, which is underpinning current levels, disappears after the conflicts are resolved.

Investors are looking ahead at Wednesday’s Fed minutes where additional information will be provided about the central bank’s future monetary policy. So far, most of the key U.S. economic indicators have shown readings that meet and in some cases exceed expectations, which is in line with Fed’s requirements to start scaling back the bond purchases.

Meanwhile, market players are also keeping a close eye on this weeks key China economic data as the Asian country is the worlds second biggest oil consumer, accounting for 11% of global consumption. Signs of economic expansion or contraction have a strong influence in oil pricing. China’s CPI is due on Tuesday, while the country’s Trade Balance will be published on Wednesday.