Egypt conflict causes rise in oil prices

Oil prices continued to climb on July 8 due in part to increased turmoil in Egypt and fears that the conflict may escalate into a civil war and eventually threaten exports of crude from the Middle East, according to several energy industry analysts. Natural gas, however, fell in the New York futures market.

At least 51 protestors and three security officers died and hundreds of people were injured in the latest street clash in Cairo between the military and supporters of Egyptian President Mohammed Morsi, who was ousted last week by a coup. Egyptians are deeply divided over the issue, and the Muslim Brotherhood, which supports Morsi, has called for rebellion against the military.

Initial news of Morsi’s ouster had little effect on oil markets going into the July 4 Independence Day holiday in the US — “an indication [traders] perhaps viewed this development as constructive,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. Egyptian generals claim Morsi — longtime leader of the radical Muslim Brotherhood before becoming Egypt’s first democratically elected president — was using his office to strengthen the Brotherhood’s political power.

However, crude prices escalated when the New York market resumed floor trading July 5 with reports of unrest in the Suez and Sinai regions. “Amid persistent uncertainty, the geopolitical risk premium associated with events in Egypt remains elevated,” Ground reported.

“The importance of Egypt in the global crude oil market has less to do with its domestic production than it has to do with transportation,” he said. “It is Egypt’s position as a major transit point for global crude oil movements that explains the current concern and geopolitical risk premium. The international Suez Canal through Egypt drastically cuts the shipping distance from the Middle East to Mediterranean markets and the east coast of North America. Currently 800,000 b/d of crude moves through the canal — a fairly small amount compared to global oil trade. Of greater importance to global crude oil transportation is the SUMED [Arab Petroleum Pipelines Co.] pipeline, which also connects the Red Sea to the Mediterranean with a throughput of 1.7 million b/d (capacity is 2.4 million b/d).

“Consequently, should unrest in Egypt escalate to the extent that these important routes are closed, around 2.5 million b/d of crude oil and 1.4 million b/d of petroleum products (transported via the Suez Canal) would have to be redirected around Africa, adding around 15 days of transit to shipments destined for Europe and 8-10 days for those destined for the US,” he said. “Clearly, such a disruption would be non-trivial.”

However, Ground said, “While there is still much uncertainty over how things will play out in Egypt, threats to operation of the Suez Canal and the SUMED Pipeline are still far-removed. Consequently, barring a substantial escalation of tensions whereby oil production appears to be threatened either directly in Egypt or via a spreading of instability to other oil producers in the region or more importantly if oil transportation through the Suez Canal or SUMED pipeline looks to be disrupted, this geopolitical risk premium should fade in due course.”

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