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3 Jul, 2013 10:05

Oil surges to 14-month high over Egypt unrest

Oil surges to 14-month high over Egypt unrest

Political unrest in Egypt and concern the turmoil will escalate have pushed US light crude oil prices to nearly $102 a barrel for the first time since May 2012.

Both WTI and Brent futures for August have hit record- highs. WTI hit a 14-month high at $102.16, and Brent soared to $105.59 on Wednesday's trading floors. The narrow spreads on the futures also have analysts worried.

Prices are inflated and should realistically be trading between $90 and $95 a barrel, but could also be high on the heels of America’s 4th of July holiday, one of the biggest travel days of the year.

Traders are also eagerly awaiting a report from the Energy Department on US crude stockpiles, anticipating an increase in demand, as the report is expected to show between a 2.5 to 3 million barrel decrease. US crude inventories shrank by 9.4 million barrels last week. 

Suez Crisis

The market is bullishly reacting to the uncertainty of Egypt’s future, as turmoil in Cairo could translate into higher oil futures, but of even greater concern is that the unrest could deadlock the country’s crucial trade route, the Suez Canal.

The geopolitical risk in a regime change could threaten oil transport and the operation of the Suez Canal, which handles around 800,000 barrels of crude and 1.4 million barrels of refined fuels daily, according to a Barclays estimate for 2011.

Though Egypt is not a producer, the Suez Canal grants it great authority over global oil supply and transport. 

Egypt’s military has made safeguarding the Suez Canal a priority as scores of protestors take to the streets of Cairo, situated about 125 kilometers west of the waterway.

A man looks as the world's biggest Liquefied Natural Gas (LNG) tanker DUHAIL as she crosses through the Suez Canal (Reuters).

“There are no signs that the Egyptian armed forces, which have given the Mursi government 48 hours to resolve the crisis, have any intention of taking such drastic action,” Barclays analysts wrote to Bloomberg in an emailed report Tuesday.

Linking the Red Sea and the Mediterranean, oil shipments through the Suez Canal reached 140.8 million tons in 2012, up 22.5 percent from 2011, the canal’s statistics department said. The majority of the crude is northbound. LNG transport is also on the rise in the canal, and has increased six-fold since 2008.

Protests in 2011 which ousted Hosni Mubarak didn’t directly disrupt traffic in the 190 kilometer passageway, but it did slightly slow traffic. In 2011, 17,799 ships transited the Suez Canal from both directions, petrol tankers accounting for 20 percent of traffic and LNG tankers for 6 percent, the canal's statistic department reported.

Closure of the canal would most likely require military support, and with 8 percent of the world’s water bound trade passing through, keeping it open will remain a priority for the Egyptian government, as well as regional partners.

A map showing the Suez Canal, which is 190 kilometers east of the protests in Cairo, and intersects Port Said, where protests broke out in March 2013. Image from www.eia.gov

The canal, along with exports and tourism, is a key foreign-currency earner in Egypt, which generated $3.8 billion in the last nine months.

Shipments increased by 13 percent in the first quarter of 2013 year-on-year, but prices could be thrown off kilter by Egypt’s second round of serious political protests in 2 years. The transit service tariff is based on a variety of factors- lost opportunity cost, currency baskets, energy prices, piracy risks, and alternative route pricing.

Protestors descended on Port Said, a town the Suez Canal snakes through, in March 2013, demonstrating against the latest verdict on the deadly Port Said stadium riot in February 2012. Three were reported killed and 65 injured.

The canal closed during the 1956 Suez Crisis, and ships were rerouted around the cape of South Africa.

'Biggest protest in Egypt's history'

Scores of Islamist protestors have taken to the streets, calling for President Mohamed Morsi’s resignation. The Egyptian army will suspend the constitution and dissolve the parliament in a takeover if an agreement isn't reached by 16:30 Wednesday.

Egypt’s central bank has instructed banks to close by 2:00pm instead of 5:00pm, in fear a military takeover backed by protestors may ensue. The bank also bumped up their currency auction to 10:30a.m. instead of 11:00a.m.