Oil price spike could hurt stocks, economy

Adam Shell and Kim Hjelmgaard | USA TODAY

Show Caption Hide Caption Egypt: Army to suspend constitution, legislature Egypt's state news agency says the military has drawn up a plan to suspend the constitution, dissolve the legislature, and set up an interim administration if President Mohammed Morsi fails to reach a solution with his opponents. (July 2)

Oil prices closed 1.6%25 higher in New York Tuesday

Egypt is not an oil producer but does control the Suez canal

Military has set a Wednesday deadline for end to the crisis

The price of crude oil traded 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.

As the stock market closed a shortened July Fourth holiday trading session, the price of crude oil hit was trading at $101.22 barrel, up $1.62, up about 1.6% 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."

Contributing: The Associated Press