Unrest in Egypt added fuel to the fire under global oil prices, with the leading international crude topping $100 (U.S.) a barrel for the first time since 2008, as traders worried about supply disruptions and political upheaval in the Middle East.
While the drama in Egypt was a key contributor to crude price increases on Monday, analysts say oil is also climbing on signs of resurgence in industrialized economies and simmering inflation in key emerging markets.
Oil prices were up sharply across the board, despite there being no clear threat to the transport of crude through the Suez Canal or a key pipeline connecting Middle East producers with European markets.
"This upheaval came out of left field and really surprised people," said Michael Lynch, president of Cambridge, Mass.-based Strategic Energy & Economic Research. "People are afraid of a domino effect - spreading to places like Saudi Arabia - and that's helping to affect the market."
Rising oil prices threaten to undermine the global recovery by driving up the cost of transportation for businesses and consumers, leaving drivers with less money to spend on other goods. Higher oil costs are also spurring broader inflation pressure, at a time when rising prices for food and other items are forcing emerging economies such as India to raise interest rates.
On Tuesday, in London, Brent crude was down 49 cents at $100.52 a barrel on the ICE Futures exchange. On Monday, crude traded as high as $101.73. By early afternoon in Europe, benchmark crude for March delivery was down 60 cents to $91.59 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose $2.85, or 3.2 per cent, to settle at $92.19 on Monday.
North Sea Brent crude - which is a benchmark for global prices - climbed $1.53 to around $101 a barrel Monday, while North America's trendsetting West Texas intermediate (WTI) shot up $3.11 or 3.5 per cent to $92.45 (U.S.) in trading in New York. WTI prices have lagged Brent due in part to the glut of crude, including Canadian imports, at the Cushing, Okla., hub where it is priced.
Oil prices rose through the final quarter of 2010 and through much of January, with Brent flirting with the $100 mark several times. But Brent and West Texas - which sets the benchmark for Canadian crude - had retreated prior to the eruption of demonstrations in Egypt that demanded an end of the regime of dictator Hosni Mubarak.
Some three million barrels a day of crude and refined products are transported through the Suez Canal and an adjacent pipeline. So far, both facilities are operating normally, but higher crude prices reflect the re-emergence of a political-risk premium that had long been absent from the market.
"European inventories are not too bad. So if you lost the Suez Canal, I don't think it would be a big problem," Mr. Lynch said. "But it is the sort of thing that traders get nervous about."
In the event of a complete closing of the canal, producers would have to ship supplies to Europe around the Horn of Africa - delaying deliveries by as much as 10 days.
North American prices also got a bounce from signs that the U.S. economy is picking up momentum, as Americans' consumer spending in December rose sharply.
"There is a fundamental demand for crude oil that is going to hang around after Egypt's problems quiet down," said Hamza Khan, an analyst with the Schork Report, an investing newsletter.
"The Suez Canal is critical and we're going to see an increase in volatility. But the political uncertainty is just one of the factors causing the rally - there are a host of increasing consumer demands factors which have been pushing markets higher over the last several weeks."
The rebound in global economic growth last year - primarily in emerging markets - drove demand for crude oil up by some 2.8 million barrels a day to 87.8 million barrels. While that pace is expected to slow in 2011, the growth should be enough to maintain prices around the $100 mark, says Deutsche Bank energy economist Adam Sieminski.
But the riots in Egypt - which were caused in part by rising food costs and high unemployment - also serve as a reminder to the Organization of Petroleum Exporting Countries that higher crude prices carry a political cost that may rebound on them.
Saudi Arabia - with nearly five million barrels a day of idled production capacity - has signalled it would boost production if necessary to moderate any price increases, whether they are caused by political risk or higher consumption.