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Why is Egypt Affecting WTI Crude Prices?

Brian Hicks

Written By Brian Hicks

Posted July 5, 2013

Tensions mount in Egypt.

The Egyptian military has arrested and deposed Islamist leader Mohammed Morsi and other Muslim Brotherhood supporters after a mass uprising from the public. Arrests have been issued for over 200 officials. The parliament has also been disbanded, with the Egyptian constitution suspended. Chief Justice Adly Mansour has been sworn in as Interim President.

The downfall of Morsi marks an unprecedented situation in light of former President Hosni Mubarak’s removal by the military just 1 ½ years ago. Between Mubarak, who was a relatively secular dictator and Morsi, a hard-line Islamist who instituted religious mores in a new constitution, it is not certain which faction will ultimately gain power.

suez canalCurrent speculation holds that an impending military power grab is on the horizon. There is also concern of long-term political chaos and eventual civil war.

Events in Egypt spawned a shockwave throughout the oil market, sending the price of U.S. crude above $100.

The situation in Egypt has oil traders nervous, mostly from concerns that political instability could spread to other countries. The Syrian conflict grows more perilous as the U.S. further entrenches itself, and previous skirmishes in Algeria, Tunisia, and Libya are potential powder kegs from the viewpoints of traders.

The main concern is the shutdown of or interference with oil flow through the Suez Canal and the Suez-Mediterranean (Sumed) pipeline. But there has been no indication of this happening thus far, and the military recently assigned more security around the canal.

The Suez Canal ships approximately 2.4 million barrels of oil from the Middle East to European and North American markets, and the Sumed pipeline transports 2.5 million bpd.

On Friday, WTI crude futures reached $102.44, while Brent for August hit $106.77. This marks a spread of roughly $4.30, the narrowest gap between the two benchmarks in over two years.

Egypt & WTI?

Some are wondering why WTI crude would be affected by the Egyptian Revolution. Oklahoma crude should have nothing to do with Egypt, especially since the country is not a major oil-producing nation. And Brent crude from the North Sea generally does not flow through the Suez Canal.

However, traders should not get too worried, since we saw a similar oil surge when Mubarak was deposed.

And the shift in WTI price has much to do with factors outside of Egypt. WTI has already been catching up with Brent because of greater rail and pipeline construction to relieve oil gluts in Cushing, Oklahoma. And we’re living in a globalized world where nations, people, and economies are tied together like never before. Regardless of the benchmark, major events and crises will have an impact on oil, regardless of location.

It is also a sign that WTI is more connected to the global market in a way many did not anticipate – a positive signal for U.S. crude exports in the near future.

The days of WTI being an isolated and lagging benchmark are drawing to a close. The narrow margin between Brent and WTI is proof that the two benchmarks are reaching the same level on the world stage.

Even though WTI is being absorbed into international affairs, it is important to ramp up domestic production to at least minimize the shockwave of political instability in the Middle East.

The U.S. is already on a steady track to surpassing Saudi Arabian production and becoming fully independent of OPEC by 2030, according to the International Energy Agency. Energy analyst and former executive of ENI (NYSE: E) Leonardo Maugeri made a similar claim in a recent paper about U.S. energy potential, highlighting America’s unique conditions for innovation and superior drilling equipment. The only other nation that has the potential to exceed Saudi Arabian production is Iraq, but Iraqis are being bogged down by corruption and political fallouts.

Unlike other countries, the U.S. has the perfect stew of open terrain, stellar drilling technology, and fracking breathing room to achieve a successful crude-export economy.

There are still issues to sort through, such as landholding rights, an insufficient amount of pipelines, and political wrangling, but production presses on despite the obstacles.

Egyptian Business Fallout

Nations that engage in energy commerce have been affected, but which companies could feel the pinch if Egypt worsens?

Arab Petroleum Corporation, National Oil Company, and Saudi Aramco could be impacted, since these companies own the Sumed pipeline. And a closing of the Suez Canal would prevent southern African oil tankers from getting through, forcing ships to take a detour averaging two weeks or more, depending on the destination.

A shut down of the canal would spark daily rising costs as oil merely sits on tankers. And the cost in fueling vessels will also drive up oil before hitting the market.

If the Suez Canal is blocked, Nordic American (NYSE: NAT), Teekay Tankers Ltd. (NYSE: TNK), and Euronav (EBR: EURN) would feel a great amount of pain. These companies are owners of Suezmax tankers, a shipping fleet transporting African and Middle Eastern crude into European and North American markets. North American demand will account for 27% of the company’s revenue.

Suezmax tankers have suffered from a glut because of falling demand caused by U.S. oil production, but the company has benefited from EU-imposed sanctions on Iran. Iran has traditionally used the Sumed pipeline to get oil to Mediterranean ports, but the crippling of the Persian nation’s energy economy forced Europe to look elsewhere to countries like Saudi Arabia and Iraq to make up for the loss, which in turn boosted Suezmax shipping commerce. Iran was already at a disadvantage because its larger ships could not fit through the Suez, forcing the nation to use the Sumed pipeline instead.

And Mediterranean ships and U.S. refiners prefer the smaller-sized Suezmax tankers because of their ability to seamlessly travel through the Suez.

But a shutdown of the Suez Canal could force Suezmaxes to take alternate routes.

Iran and Syria have been large transporters of oil through the Suez as well. Iranian companies Islamic Republic of Iran Shipping Lines and National Iranian Tanker Company have shipped Syrian oil through the Suez Canal under different flags. Singapore is one nation that has received oil from these tankers.

Nile Petroleum recently made an agreement in Egypt, acting as a primary distributor of Shell (NYSE: RDS-A) lubricants for ships passing through the Suez Canal. Nile also has plans to expand fueling ports in the Red Sea.

Nile made the agreement with Shell Egypt, a company hoping to foster economic progress in the nation, but some shipping companies are uneasy about piracy in the Red Sea and political instability in Egypt and elsewhere. And toll price increases certainly haven’t helped matters.

But Maersk, a shipping company from Denmark, recently shifted business from the Panama to the Suez because of fewer ships and lower-priced tolls. However, the situation in Egypt could have them heading back to the Panama if things get worse.

Aside from energy commodities, many goods are also transported through the Suez, which could have an effect on the manufacturing sector. For now, at least, investors who have a stake in smooth passage through the Suez Canal will have to sit back and watch as the Egyptian situation unfolds.


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