Oil Prices Soar on Unrest

Brian Hicks

Written By Brian Hicks

Posted August 16, 2013

I recall the hopeful optimism that Egyptians displayed to the world when Hosni Mubarak was deposed in 2011.

It seemed like Egypt was on the right track to transparency and an open democracy, but recent events have shown the opposite to be true.

If you haven’t heard by now, things have gone from bad to worse in Egypt.

oil price Nov 30Interim Vice President Mohamed Elbaradei has resigned, and the military has declared a state of emergency. Over 500 supporters of ousted leader Mohamed Morsi have been killed in protests by the police.

And now the markets are reacting to the situation, although there is little reason to worry.

The markets are reacting in fear of a shutdown of the Suez Canal, along with fears of violence spreading into neighboring countries.

But I’m not really concerned about an impending shutdown of the Suez, and here’s why.

If you’ve been following Egyptian politics these last few years, you’ll notice that the military is the arbiter of stability and the status quo.

Protesters of Mubarak called for the military to step in and remove the dictator from his post, and the protesters who called for Morsi to step down also invoked military intervention.

Above all, the military wants to preserve order, and this extends to the Egyptian economy.

When Morsi was overthrown, military forces safeguarded the Suez to preserve transport routes from being interrupted, and now that the military is essentially governing the nation, the Suez Canal and the SUMED pipeline both stand a higher chance of remaining open and safe.

I’m not condoning the establishment of military rule, but from an investment perspective, military leadership will do everything possible to secure open routes.

But regardless of military crackdowns, Egyptian instability in leadership these last few years has caused a ripple effect in the oil markets.

But is oil itself the primary cause of Egypt’s instability?

Well, not entirely, but high oil prices have played an indirect role in political chaos. Egypt is a heavy subsidizer of oil, regardless of how high energy prices spike, in fear of political ramifications. Energy subsidies in Egypt amount to $16.8 billion, Oil Price reports.

On top of that, Egypt loses 66 percent value for every barrel of oil produced. Subsidizing high energy prices has ballooned the deficit.

Overall, the national debt in Egypt was 73 percent of GDP, and the government suffered from an 8 percent budget gap. All of these factors have an impact on the social welfare of the populace, including basic necessities like health care and education.

And the root cause of these Egyptian uprisings has been the lack of these essential services.

Now, I’m not going to pin Egypt’s problems on energy prices alone. Mubarak misspent Egyptian assets and used his position to further his own wealth throughout the decades at the expense of his people.

But if Egypt is going to recover, part of the situation calls for the government to make a long-term commitment to cutting subsidies when energy prices are too high, and this is something that any government should follow around the world.

Should you let Egypt affect your stocks?

On Thursday, oil prices spiked to $107.33 for WTI and $111.11 for Brent crude. Analysts believe oil prices could go as high as $114.

But I would not place too much credence in the current rise of oil prices, since this knee-jerk reaction is common in any major event regarding the Middle East. Oil prices rose when Mubarak was overthrown, then the same happened with Morsi, and now prices are rising again under new events.

The market tends to take a fearful stance on any issue surrounding the Middle East, but everyone should take a breather and watch as the situation unfolds.

Brent for October delivery has already dropped to $109.60, and I believe prices will decline in the future.

But I would say shorting your oil stocks is a little early, since we are only a week into this latest incident.

Egypt is essentially the gatekeeper of Middle East oil, but it is not a major oil producer, and it’s not worth selling your stocks at this moment.

And I don’t believe Egypt will end up like Syria, since many Egyptians do not have widespread access to firearms unless outside forces intervene. But Egypt is still in for a long fight, since Morsi supporters are not only vowing to return to power, but they hope to overthrow the military coup as well.

But here are some other factors driving up oil prices.

Labor issues in Libya are affecting delivery demand in September of this year, cutting oil production by 650,000 bpd from 1.65 million bpd one year ago. And Iraq is going through troubles of its own, with maintenance issues behind the slashing of oil production by 500,000 bpd in September. And there have been terrorist strikes on pipelines connecting Iraq to Turkey, which is having an effect on supply.

The situations in Egypt, Iraq, and Libya has increased oil prices by at least six dollars.

But these events in the Middle East have not driven up gasoline prices in the U.S., since stockpiles are at healthy levels. Gasoline futures contracts did not rise along with oil prices.

And the Fed’s stimulus measures are spawning more optimism in the economy.

You may also get the feeling of buying into the market quickly because of perceived dwindling supply, but supplies are doing just fine.

Thanks to North American production, oil supplies are aplenty, despite a decrease in stockpiles.

The drop in stockpiles has actually caused an increase in WTI crude prices, since it is a signal by many that an uptick in the economy will call for higher demand of gasoline, diesel, etc.

But regardless of domestic confidence, the Middle East will continue to affect oil prices, whether it is Brent or WTI.

And while the civil unrest in Egypt is worth keeping an eye on, I would hold off on taking drastic steps with your stocks, since the instability there is still a blurry picture that is coming into focus.

Good luck investing.


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