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Suez Canal Blockage Impacts Oil Prices

Updated: Apr 9, 2021

As a commodity, oil prices fluctuate more than stable assets such as stocks and bonds. Oil prices are based upon several factors, one being production decisions taken by producers like the Organization of Petroleum Exporting Countries (OPEC), sovereign petro-states like Russia, and private oil-producing companies, such as ExxonMobil. Like any other product, the laws of supply and demand influence prices. A historical anomaly hit oil markets in April 2020. With the pandemic bringing the economy to a standstill, there are tons of unused oil that energy companies have run out of room to store. If there's no place to put the oil, no one wants a crude contract, resulting in WTI Crude's fall to -$40.32 in May 2020. On the contrary, on Tuesday (3/23), The Suez Canal-one of the most critical yet precarious waterways on the planet-was blocked by a mega-ship loaded with containers that would stretch more than 120 kilometers (75 miles) end to end. This blockage doesn't just affect the global shipping industry or the Egyptian economy but also the global crude oil prices. On Sunday (28/03) global crude oil prices rose about 4% According to Antara, the price of Brent crude oil futures for May delivery increased USD 2.62 (4.2%) to USD 64.57 per barrel on the London ICE Futures Exchange. As such, West Texas Intermediate (WTI) crude oil prices for May delivery increased USD 2.41 (4.1%) to USD 60.97 per barrel on the New York Mercantile Exchange. In addition, oil prices have also been influenced by OPEC+ policies as Goldman Sachs expects OPEC+ to maintain production levels with an increase of 3.4 million barrels per day (BPD) through September 2021.

Suez Canal plays a vital role in oil transit, referring to data intelligence firm Kpler, 1.74 million BPD traveled through the canal. Performing this colossal role in world trade has sure furnished the Suez Canal powers to strike oil prices. Incorporated in 1985, it has experienced five times blockage, each time bringing a hurricane into the world of trade. The occurrence of this fluctuation in oil prices, as was foreseeable, influenced the movement on the capital market. As of (3/30), IHSG closed at level 6,166.82, dwindling as much as 0.46%. Today IHSG closing was actually in contradiction to what appeared on Asian Stock Market, which surprisingly strengthened during its closing. Artha Sekuritas Indonesia analyst Dennies Christoper Jordan pointed out, IHSG also received sentiment from the weakening of several commodity prices asides from fluctuations in oil prices. In consequence of this sentiment, he predicts the index will move within the range of support at 6,122 - 6,144 and resistance at 6,209 - 6,252. Oil stocks in Indonesia are still stagnant, but there are cases such as PT Elnusa Tbk. (ELSA) which rose 0.55% to IDR 364/unit. However, due to the smoldering of the oil refinery in Balongan, it tends to weaken.

Overall, the global oil price has a significant role in determining the stock index since it is the leading cause to affect the mining index sector's price. Nevertheless, in 2008 an economist at the International Monetary Fund (IMF), Andrea Pescatori, discovered that stock prices and crude oil prices do not have a strong relationship. As he mentioned, the high oil price could drive viable oil companies' investments to exploit higher-cost shale oil deposits. Meanwhile, there is a distinctive outlook on this occurrence. The Suez Canal accident has interfered with the vast global trading system, including the oil supply chain worldwide. The obstruction of the global oil supply chain increased the global oil price, thereby reducing corporate earnings. Responding to this, investors are making their sentiment of the international oil price that fluctuated, influencing their stock portfolio. As IHSG showed a stagnant graph, there are other price factors such as wages, interest rate, and technology that could offset the increase of the global oil price. Another possibility that covers the fluctuated global oil price to IHSG is a preventive policy that corporations thoroughly conduct. All in all, the movement of stock indices such as IHSG is still shadowed by the fluctuating global oil price and other commodities that are corrected.

Sources :

CNBC Indonesia

CNN Indonesia

The Financial Times

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