It is odd to see oil prices fall back today while every other risk asset seems to be enjoying a day in the sun. However, there are sensible reasons for this move.
First, despite the tragic events overnight in Egypt, the immediate shock from the deposition of President Mohammed Morsi has worn off. The country is still in a state of flux, and it is far from clear whether or not the Muslim Brotherhood will meekly accept their loss of power and move on. However, the sight of revolution on TV screens has awakened markets to the possibility of further disruption in Egypt. The country may not be a major oil producing state, but its position as the owner of the Suez Canal means it exercises a powerful hold on investors’ minds (even if many oil tankers today are too large to pass through the canal).
As well as the trouble in Egypt, the US economy continues to show signs of improvement. Friday’s non-farm payrolls underlined the situation, as job growth proceeds apace. More jobs mean more consumption, followed by a higher demand for oil. The tragic accident in Canada shows how demand for oil has rocketed in recent years, with much of it transported via rail.
The drop back in the oil price is likely to run out of steam around support at $101, the lows of which held on an hourly basis throughout last week. $104 remains the level to break, but as with all other markets this week traders will be on edge until the Federal Reserve minutes are published on Wednesday.