EDITOR: | July 4th, 2013 | 1 Comment

Egyptian coup prompts oil rally and fear in the markets

| July 04, 2013 | 1 Comment

suez oilThe price of oil has risen markedly in response to the military overthrow of Egyptian President Mohammed Morsi. Egypt is a major transit point for the international oil trade. Egypt is not an oil exporter, but is the home of the Suez Canal through which pass two million barrels per day, which makes it a highly strategic location for the movement of oil from the Gulf region. In addition, several pipelines that carry oil from the Middle East and North Africa also pass through Egypt. Investors fear most is in Egypt clashes between the army and the most radical Islamists, with the risk of spillover into other countries in the Middle East, which lack some of Egypt well entrenched mechanisms to restore stability.

Egypt’s first democratically elected president, Mohammed Morsi, celebrated his electoral victory a mere year ago. However, in that time, he seemed to promote policies, laws and attitudes that divided the country rather than brining it closer together. Morsi, who hailed from the Muslim Brotherhood (MB) – and who was a second or third choice candidate from the MB leadership – did not manage, or apparently did not even try to reach out and build a consensus beyond his own movement. This is perhaps the fatal mistake that resulted in millions of Egyptians from all political stripes to sign a petition demanding his resignation. And so Egypt will re-embark on the ‘transition train’, which should – emphatically conditional – lead to a new Constitution and then fresh presidential and parliamentary elections. The Muslim Brotherhood will probably stay out of the transition, which may end up being marred by more violence. This transition, shuttled  by the army – considered a moderating, if meddling, actor in Egypt – appears to have reassured the markets and oil prices relaxed slightly but remained solidly above USD$ 100.

If cool heads prevail, the official MB will re-examine Morsi’s considerable mistakes and run again in a more moderate guise in the next round. Similarly, the more radical Islamist forces, which contributed absolutely nothing of even minimal value to solving Egypt’s real problems, foremost among which is the economy, will likely not make it to the next legislature. The Egyptian military coup may have been ‘soft’ but it has generated uncertainty for Egypt, the most populous Arab country, and for the Arab world in general, putting into question the socio-political developments of the past two years that have come to be known as the ‘Arab Spring’.  Indeed, the deterioration of the situation in Egypt has brought geopolitical risk back at the center of the oil market considerations, already burbling from speculation linked to the Brent-West Texas Intermediate (WTI) spread and the drop in US commercial oil stockpiles in the U.S. (10 million fewer barrels last week pushing prices above USD$ 100/barrel, or the highest prices in over a year.

The Egyptian coup, more specifically, has increased concern over the repercussions that it may have on the crude oil transport routes. Tanker operators grew more alarmed due to fears of a slowdown of traffic in the Suez Canal through which pass some 4.5% global oil and 14% of Liquefied Natural Gas (LNG) exports. Already last February, the offices of the Suez Canal Authority had to close down because of mass protests in Egypt, boycotts leading to damages inflicted against Coast Guard vessels. Last weekend there was bombing attack in Port Said, where the canal empties into the Mediterranean. The coup proceeded in relative calm, but it cannot be excluded that in the face of more tensions, the Army might decide to close what is an important source of revenue for the government. This is no fantasy; it has happened before. In 1956, the Suez Channel was shut down for four months in 1956 during the Suez Crisis and for 8 years, from 1967 to 1975, following the Six-Day War. Oil was able to travel along alternative routes, but the time and cost of transport soared.

The same could happen today, although there is a pipeline that allows for a bypass of the Suez Canal. The pipeline has a maximum capacity of 2.5 million barrels a day (bpd) but it is very under-utilized and increases the risk that there may be some serious crude oil supply disruptions – and higher oil prices – in the near future. While Egypt took the limelight, Libya, holder of Africa’s largest oil reserves, has been faring no better, fueling concern. Protests have erupted near several oil facilities, which have caused production output to fall to 1.16 million bpd (Reuters), compared to some 1.3 million barrels per day a week or so ago and normal production rates of 1.6 million bpd. Nevertheless, while a short term oil rally may be sustained, caution should prevail as oil consumption in Europe and emerging countries has stabilized (after signs of increasing) and because the International Energy Agency has reported an increase in the production from such non-OPEC member countries as Brazil, Canada and the United States.


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  • Sue Glover

    Great article Alessandro. Great background and analysis.

    July 5, 2013 - 12:27 PM

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