Why The Oil Market Is Wrong On Egypt

This guest post is by Robin Mills, energy strategist and economist. He is the author of “The Myth of the Oil Crisis” and “Capturing Carbon”. 

An unlikely pairing has made it to the headlines this week: international oil markets and Egypt.

The price of US light crude oil has risen above $100 a barrel for the first time since September 2012 while Brent crude oil, the European benchmark, has risen to about $105, apparently on concerns over political turmoil in Egypt.

Energy analysts left, right and centre say there’s risk the unrest in Egypt could spread to other parts of the Middle East impacting oil supply.

But there is no truth in this.  Oil markets are usually jumpy over perceived geopolitical risk, even when there is no logical connection to any realistic supply disruption. 

Most importantly, Egypt is not a major oil exporter – in fact, it is a net importer of about 90,000 barrels per day (bpd). Fears that Egyptian turmoil will spread to neighbouring countries could only be rooted in an ignorance of the region and a lack of awareness of the past two and a half years.

Some of the increase in oil prices may be driven by fears for the Suez Canal.  But this is actually not such a vital waterway for oil – nothing like the celebrated Strait of Hormuz, which carries some 17 million bpd of crude oil.

In contrast, the Suez Canal transited a measly net of about 100,000 bpd (see the table below for details) in the first three months of this year.

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What’s more, the Suez Canal is even less significant for oil transport than Egypt’s Sumed pipeline, which runs from Ain Soukhna on the Red Sea, crosses the Nile south of Cairo and terminates at Sidi Kerir near Alexandria on the Mediterranean.

It carries crude oil from south to north, and transported 1.7 million bpd of oil in 2011, up from 1.1 Mpbd in 2010.

If anything, liquefied natural gas (LNG) transit through Suez is more significant on a net basis, mostly running south-north (probably largely representing Qatari supplies to Europe).

A disruption in Suez, which seems unlikely, would have much more significant implications for world trade generally, than for oil specifically.

The bottom line is that more worrying for oil markets should be the disruption of Libyan production, now below 1 million bpd due to strikes and protests, and the continuing crisis in Iraq, a major oil producer. Yesterday, in continuing insecurity, two cars bombs exploded in the southern oil city of Basra, which had been relatively secure.

Iraqi oil exports in June were at a 15-month low due to pipeline sabotage, technical problems and bad weather at southern loading ports.

The real reason there has been a relative gain of US oil prices over European prices is clearly not because of Middle Eastern events, but due to other domestic developments including new pipelines that will open up once landlocked crude supplies in Oklahoma.

On the other hand, negative factors seem to be overlooked – the reduced probability of conflict with Iran after the election of pragmatist president Hassan Rouhani, and weak Chinese economic data.

As often happens, with a collection of data pointing in opposite directions, the oil market has chosen the most dramatic, if the least relevant, to respond to.




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