All eyes are on the Middle East as political turmoil in the region could have long-term effects on oil prices and supplies.

As May began, the news of al-Qaeda leader Osama bin Laden's death spread throughout the world. Nearly a decade after the September 11 attacks, the figurehead of the organization responsible for the worst terrorist incident in U.S. history was finally neutralized.

Global Hunter Securities analyst Ravi Kamath said in a May 9 energy note that the killing of bin Laden led to a strengthening of the U.S. dollar, followed by a drop in crude oil prices.

"West Texas Intermediate crude pricing decreased 14.7% to $97.18 per barrel, the biggest weekly decline since December 2008, as the U.S. announced the killing of Osama bin Laden, the dollar strengthened versus the euro and crude supplies reached a six-month high."

The analysts at Tudor, Pickering, Holt & Co. see the death of bin Laden as having very little impact on oil supplies. "(In) our view, al-Qaeda still exists and future strikes remain a risk…but reality is al-Qaeda has not focused on oil supply/transportation targets over the past decade, so we don't think bin Laden's death should have significant impact on crude (up or down)."

Raymond James & Associates analyst Darren Horowitz concurs, noting that political tension in the region is the main threat. "Currently, what is unambiguously at the top of the list of oil market concerns is the tension between the Arab 'street's' demands for political/social reform and most Arab leaders' stubborn refusal to offer that reform."

At press time, uprisings continued in oil-producing nations such as Libya and Yemen.

"In our view, the military situation in Libya threatens to devolve into a protracted stalemate with a growing potential for damage to oil facilities," said Deutsche Bank chief energy economist Adam Sieminski in an April 8 analyst report.

Events in Libya led to a fall in oil production from 1.6 million barrels per day at the start of the year to 300,000 barrels per day as of early April.

Sieminski agrees with the U.S. Department of Energy's findings that, "while events that cause oil disruptions may be transitory, their impact on oil production levels can persist for an extended period."

"As we see it, the first US$15-per-barrel leg up in oil prices (from US$80 to US$95 per barrel) coincided with the market starting to feel the pinch of the huge global demand increase that took place in 2010," says Sieminski. The Libyan export interruption likely contributed to half of the second $15 spurt, he adds.

Libyan oil, a low-sulfur crude, is in high demand for light products, and as such is hard to replace by higher-sulfur Saudi spare capacity.

Sieminski adds that Libya is out of the market for the medium term, which "portends a continuation of further advances in the oil price."

Barclays Capital analyst Helima L. Croft says in a May 5 analyst report that while Yemen is less in the spotlight, the situation in its oil industry has deteriorated steadily. It produces a "not-so-insignificant" 260,000 barrels per day, and rebel attacks on the country's pipelines have halted oil shipments as well as work at the 130,000-barrel-per-day Aden refinery.

"With spare capacity in the oil market already falling, losses of even the smallest amount start to make a difference at the margin," says Croft. "Should the situation in Yemen worsen, taking out additional output, the pressure on prices could, once again, become even higher."

Yemen is on the Bab al Mandab Strait in southern Arabia, one of the world's most strategic shipping lanes. Approximately 3.7 million barrels per day pass through the strait, and disruption to shipping could prevent tankers in the Persian Gulf and the Gulf of Aden from reaching the Suez Canal. To date, the political upheaval in Egypt has not affected the movement of oil in the Suez Canal.

Croft says a blockade could end up "requiring a costly diversion around the southern tip of Africa to reach Western markets. In theory, the Strait of Bab al Mandab could be bypassed via the East-West oil pipeline, which crosses Saudi Arabia with a nameplate capacity of 4.8 million barrels per day. However, southbound oil traffic would still be blocked."

While a strengthening dollar will help mitigate some of the issues affecting oil price, conflicts in the Middle East and North Africa continue to threaten worldwide supplies, further pressuring oil prices.

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