With reports that the ship is now afloat, we can focus on the real factors affecting the oil markets.
One of the biggest imperfections in news reporting is the reactionary element that comes with it. For every event, there must be an accompanying story to explain why that event happened. The fundamental flaw of this is that there is little time to provide empirical evidence as to why that event really happened. This happens quite a lot in the oil markets.
As an energy analyst, I subscribe to an Oil Price application that notifies me of every oil-news related event that happens daily. Here is a recap of how last week went (note the words written in bold).
Wednesday 11:33am – “Suez Canal blockage sends oil prices rebounding after sell-off”
Wednesday 19:26pm – “Oil prices post a rebound as ship mishap blocks Suez Canal”
The next day…
Thursday 05:31am – “Oil falls as demand concerns trump Suez Canal disruptions”
Thursday 13:09pm – “Oil prices slide as coronavirus lockdown concerns outweigh Suez Canal disruptions”
Thursday 16:13PM – “Oil drops in volatile week while Suez Canal mishap persists”
Thursday 19:24pm – “Oil ends lower, pressured by risks to energy demand as traders eye Suez Canal prospects”
The next day…
Friday 06:09am – “Oil prices recover some ground on fears Suez blockage may last weeks.”
Friday 11:41am – “Fears of prolonged Suez Canal blockage drive oil prices higher”
Prices were rising on one day as a result of the Suez Canal blockage, the next day, prices were falling as a result of the Suez Canal blockage. The oil markets were in limbo and speculators were vulnerable to the market’s volatility as a result of that.
Oil prices are a product of demand and supply, principally. However, there are adjustments for other factors that may affect the prices. Some analysts argued that last week’s moves were just technical trading and speculatory trading. Prices were ranging between certain key levels to justify that sentiment that it really had nothing to do with ships but the interactions between Commodity Trading Advisors, Speculators and Funds adjusting their exposure to oil.
Others added that uncertainties of the effect of a Suez Canal blockage crept into traders’ mind and formed the premise for price volatility as we experienced. Another set of analysts pointed all the fingers at Coronavirus concerns and oil demands, as most European nations would still be in lockdowns throughout April. Most analysts adjusted their oil demand forecasts with this in sight. Professional oil investors understood that the event would be solved in the short-term and it might not have an effect on the supply levels needed to affect prices as countries can consume local storage in the meantime.
The truth is, the Suez canal is not the Strait of Hormuz, where some 21 million barrels — or $1.2 billion worth of oil pass through every day. The strait represents the most important chokepoint for the world’s oil supply. This would have created the platform for the volatility in prices. Although, you would argue that energy products pass through the Suez Canal which had attracted the United States interests. However, the percentage of the stranded products could have been minimal to the oil market supply and OPEC and her allies’ silence during the saga is testament to this theory.