Geopolitical risk from Egypt may prompt a major oil price increase
Oil prices have been rising and could increase further in response to the fast rising tensions in Egypt, tensions which could spread beyond its borders to other Arab countries. Brent crude oil futures have risen to their highest level in four months and the escalation of violence in Egypt will disrupt supplies from the Middle East. Brent North Sea for September delivery gained 76 cents to 110.96 dollars a barrel in midday trading in London, after reaching 111.53 dollars, its highest level since early April.
Egypt’s military is facing increasing international condemnation of the bloody crackdown against protesters conduct of the Muslim Brotherhood. Should the situation deteriorate further, the United States will be under pressure to extend its condemnation beyond the cancellation of military exercises and possibly cut off US aid of over a billion dollars, making Egypt even more vulnerable to unrest, causing an even higher spike in oil prices. General unrest would seriously risk reaching shipments of crude from the Suez Canal and the SUMED pipeline, which provides a link between Europe and Asia and allows ships safer and faster travel between the regions without having to navigate around Africa. Although Egypt is not a major oil producer, about 2.5 million barrels pass through the Suez Canal every day, or roughly 8% of OPEC production or about two million barrels per day (bpd).
Get our daily investorintel update
Egypt is the most populous Arab country and it has the power of launching a domino effect, especially in terms of risk perception for the region. If Egypt collapses, analysts and observers immediately wonder who will fall next. The Muslim Brotherhood, while rooted in Egypt, has inspired a number of Islamist political movements and parties throughout North Africa and the Middle East. The ‘Arab Spring’ has spread their influence as many of these parties have former parliamentary majorities in Morocco, Tunisia and Libya; Jordan has also an important Muslim Brotherhood parliamentary group and Hamas, in Gaza, is a direct ally of ousted Egyptian president Morsi. Evidently, the region has all the ingredients needed for an explosion and all that is needed is the trigger mechanism. Egypt is unique, and this suggests that it is unlikely to experience a sectarian civil war on the scale of Syria; however, the ‘Arab spring’ has released a ‘genie’ of revolt that has been very difficult to repress and given the levels of unemployment and social disparity, civil war cannot be entirely discounted. Civil war in Egypt would be disastrous and it would be difficult to prevent international intervention, especially where the Suez Canal is concerned. Oil exports would be at huge risk as would be international trade in general.
2013 has been a year of higher oil prices. Libyan exports have fallen by at least half and in June they fell to a seventh of its average output. Political unrest has been the main reason to account for those increases. Since January, the oil traded in a range 87-109 dollars per barrel (one barrel = 159 liters); the North Sea Brent crude hovered around a range of 97-119 dollars. Concern about the supply situation has prompted high anxiety. Unrest in Libya, attacks on pipelines, security concerns in Algeria and Nigeria – the geopolitics is currently a major factor in oil price formation. The geopolitical situation in the Middle East will keep prices at a high level, especially now that some EU countries need to replenish their stocks before winter, he says. The Libyan drop is significant in this regard; because oil exports from have been halved to less than 500,000 barrels of oil daily. Back in June, exports had stood at 1.3 million barrels. Traders justified the price increase with the closure of two major oil export terminals in Libya as a result of a labor dispute. In addition, the Iraqi-Turkish oil pipeline was closed after a bomb attack. This makes oil being delivered through the Suez Canal all the more necessary and all the more valuable, especially as there are signs that the EU has started to see a pattern of economic growth that has prompted analysts to suggest the recession is over.
Political unrest in the Middle East has generally been characterized by acts of ‘terrorism’ and sabotage. Both carry dire consequences for energy prices and the current price of oil does not take such risks into account yet. The Syrian civil war has not affected oil prices because Syria’s role in the energy game was just starting to develop with a proposed Iran-Iraq-Syria pipeline, which remains a distant prospect. The economic weakness of the industrial nations during the most intense periods of the ‘Arab Spring’ mitigated sharp rises in oil price related to political risk. Now, with economic outlooks improving in most or all OECD countries (including parts of southern Europe, Japan and the United States), political risk will take its toll and some long overdue dividends with it.
One immediate consequence in Europe is that Russia will become an even more important supplier, especially as far as the EU’s economic powerhouse, Germany, is concerned. That is, however, a small consolation for political risk. Relations between Russia and the West have fallen to their worse levels since the end of the Cold War. Some might say that a new Cold War is in the making. Threats of western boycotts of the Sochi 2013 Winter Olympics over controversial Russian anti-Gay legislation are not helping and Russia could take advantage of the fact it has some better cards to play in the situation that is taking shape thanks to the growing tension in Egypt. Oh, it should also be noted that there has been a sharp decline in US inventories of crude oil by 2.81 million barrels – rather than an expected 1.5 million barrels. Oil hunger is back and this may also prompt an increase in commodity prices in general.