[Daily Trade Alert note: Yesterday, Dr. Kent Moors was a guest on Fox Business to discuss the Egyptian political protests and the oil market. In case you missed it, his article below explains everything you need to know about this situation.]
The unfolding crisis has four impacts on oil.
Impact No. 1: Instability Can Cause Panic
First, while Egypt itself does not directly provide a great deal of oil to the international market, any instability in this region causes the traders to panic. (The hefty rises in oil prices on Friday attest to this fact.)[ad#Google Adsense]While prices are stabilizing today – after a quick round of profit-taking – they will begin experiencing upward pressure again (primarily for the reasons I will summarize below).
Keep your eyes on the Brent price in London, where the importance of what is happening on the streets of Cairo is more immediate. The price for crude is approaching the magic benchmark of $100 a barrel.
There are no indications that the unrest is likely to translate into a government takeover by radical groups. We are, of course, still quite early in the process, but Egypt remains a secular Islamic state, at least for the moment.
True, this is the birthplace of the Muslim Brotherhood some 60 years ago, the forerunner of radical Islam. However, these days, it is poorly organized, without effective leadership, and significantly weakened by government pressure over the years.
In any event, this is currently a popular uprising and bears little relationship to wider political issues – unless, of course, we assess its result to the broader region. The events unfolding, first in Tunisia and then in Egypt, have brought attention to the unstable hold governments throughout the region have on their nations.
Here is where the true problems may result.
Egypt, Turkey and Jordan are the leading secular Islamic states in the Middle East. But they have only moderate amounts of oil and gas. More disconcerting is the possibility of reactionary elements gaining control in places that have a more immediate impact on the flow of energy.
Impact No. 2: Western Producers and Drillers Could Suffer
Second, Egypt has been increasing its development offshore, especially of natural gas in the Nile Delta, the Gulf of Suez, and the deeper waters of the Mediterranean Sea.
Here, there are assets of major Western companies at stake – BP (NYSE:BP), Exxon Mobil Corp. (NYSE:XOM), Chevron Corp. (NYSE:CVX), Royal Dutch Shell (NYSE:RDS), Eni (NYSE:E), British Gas Group (OTC:BRGYY), Edison (OTC:EDIHF), and dozens of mid-sized companies.
In addition, there are substantial assets of leading drillers, including Transocean Ltd. (NYSE:RIG), Diamond Offshore Drilling Inc. (NYSE:DO), and Baker Hughes Inc. (NYSE:BHI).
What to watch here is the response to political pressures on the two dominant Egyptian state companies – the Egyptian General Petroleum Corp. (EGPC) and the Egyptian General Gas Holding (EGAS). These two control the dominant state position in all hydrocarbon projects in the country.
Impact No. 3: Eurozone Electricity Prices May Fluctuate
Third, developments there – should they lead to any interruption in deliveries – will have a more pronounced effect on the European gas market.
The discovery of large gas deposits over the past several years has catapulted Egypt into the fast track lane for liquefied natural gas (LNG) exports to the European Union.
Any problem on this front would change dynamics in LNG imports and provide instability in electricity prices on the continent.
Impact No. 4: Delivery Interruptions Bring in Serious Volatility
Finally – and, in my judgment, most significantly – while Egypt does not provide a great amount of the global oil and gas, it does control about 5% of its delivery.
Some 1.8 million barrels of oil move through the Suez Canal each day; another 1.1 million or so barrels pass along the Sumed pipeline from the Gulf of Suez to Alexandria and further export.[ad#ChinaBlankCheck]Any interruptions here would move the oil market into considerable volatility, requiring a rebalancing of contracts and a noticeable escalation in prices.
A rule of thumb to remember – each 1% decline in global supply availability without an equivalent decline in demand pushes average crude oil prices up $10 a barrel.
At minimum, therefore, that would translate into an almost overnight NYMEX price level of $140 a barrel and a Brent price pushing $150.
Currently, the only problems in the Suez Canal are a result of communications being subject to government cuts countrywide. There is no indication the oil flow is impeded at this point.
But this is a fluid situation, and the likelihood of supply cuts elsewhere in the region as the popular uprisings increase, are a genuine concern.
— Kent Moors
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Source: Oil and Energy Investor