U.S. crude oil prices surged 23 percent over the last three months due to the unrest in Egypt and fear over regional supply oil disruptions as well as easier accessibility to a glut of U.S. crude oil sitting in a vast array of Oklahoma tank farms, according to an energy economist.
West Texas Intermediate, or WTI, the benchmark U.S. crude, soared to $106.10 per barrel Wednesday, from about $86 in mid-April.
Part of the reason stems from unrest in Egypt as traders and market participants fear that civil strife in the biggest Arab country may bleed over to the Suez Canal, where 4 million barrels of oil pass every day, said Christopher Knittel, an energy economist at the MIT Sloan School of Management.
“Egypt made some players in the market very uneasy as to what might happen in the near future with supplies,” Knittel said.
The price for WTI, meanwhile, is influenced by its European counterpart, a crude known as Brent blend, which is the benchmark for two-thirds of the world’s traded crude and what Europe uses as its pricing standard. For that reason, the rise in price of Brent blend over worries about the Suez Canal have also lifted the price of WTI, Knittel said.
“Anytime there is a price increase that drives up the Brent price, that is going to affect the U.S. [prices],” Knittel said.
If the price of Brent goes up, oil producers in the Midwest and Canada have incentive to sell their oil to Europe, and that in turn will drive up WTI prices since shipping costs are expensive, Knittel said.
The other major reason crude oil prices have soared in the last three months has to do with pipelines in the heart of the U.S. The U.S. has limited pipeline capacity to transfer the abundance of oil that’s sitting in Cushing, Okla., one of the biggest oil hubs in the world.
Previously, U.S. crude stored in Cushing was shipped north and east, but because of the oil boom in the Midwest and in Canada, refineries in the eastern and northern parts of the U.S., as well as Canada, have had excess crude oil supplies.
All this has changed with recent pipelines coming online. In effect, these new lines have opened up demand from refineries for the oil stored in Cushing, and that sudden spike in demand has lifted WTI prices.