x Abu Dhabi, UAEWednesday 26 July 2017

Expect oil markets to remain calm amid Egyptian fury

Michael Hewson from CMC Markets was right. The likely impact of the events in Egypt – shocking as they are – on world oil markets is negligible. Prices were responding to more relevant factors.

The Charles Eddie, a crude oil tanker owned by Euronav, sails north through the Suez Canal in Ismailia, Egypt. Dana Smillie / Bloomberg News
The Charles Eddie, a crude oil tanker owned by Euronav, sails north through the Suez Canal in Ismailia, Egypt. Dana Smillie / Bloomberg News
'Disruptions at the Suez Canal are unlikely, but markets never move on what's likely. They move on fear" - the opinion of Michael Hewson from CMC Markets. With violence and deaths in the streets of Cairo, Shell closed its Egypt offices and oil prices approached their highest levels this year. European Brent crude was up 5 cents to $109.77 on Friday, and US crude rose 12 cents to $107.45.
Mr Hewson was right. The likely impact of the events in Egypt - shocking as they are - on world oil markets is negligible. Prices were responding to more relevant factors.
On Friday, Iraq's northern pipeline was bombed again, meaning that exports to the port of Ceyhan in Turkey are essentially shut down. Iraqi oil shipments via the Arabian Gulf will fall next month while upgrades to its southern Basra terminals are under way. Libyan exports have fallen to their lowest levels since the revolution, as protesters block the Es Sider and Ras Lanuf ports. Iraq's and Libya's problems are their own, not related to violence in Egypt.
Meanwhile, economic news is reasonably positive, raising oil demand: the euro zone finally emerged from recession this month; and the US economy appears in good enough shape for the Federal Reserve to begin scaling back its quantitative easing programme.
Two interesting features of the market are more illuminating than the headline oil price. US crude rose more than Brent, just as it did during the downfall of the president Mohammed Morsi, even though Egypt's Suez Canal is more important for deliveries to Europe.
And the futures curve is backwardated - that is, prices for oil delivered in the future are lower than today's prices. This suggests that the market is temporarily tight but expected to be better-supplied in the future.
Egypt is a moderate-sized producer and slight net importer of oil. It is a significant transit state for oil via the Suez Canal and Sumed pipeline (from Ain Soukhna on the Red Sea to Sidi Kerir near Alexandria). Sumed carried 1.1 million barrels per day (bpd) in 2011, and boosted that to 1.7 million bpd during last year when extra supplies were required to replace the loss from Libya. The Suez shipped about 2.8 million bpd of crude oil and products in the first three months of this year.
The Suez's oil role, though, is exaggerated by the headline numbers. Most of the shipments through it net out - essentially crude oil and high-quality products (petrol and diesel) go north, while lower-value fuel oil returns south. Net trade is a mere 100,000 bpd.
The loss of Libyan and Ceyhan exports - both on the Mediterranean - does exacerbate any risk from Egypt. Saudi Arabia has already increased production from around 9.6 million bpd in June to 10 million bpd in July. As the Gulf summer wanes, Saudi domestic demand will drop, giving it more latitude to replace Libyan supplies to Europe, but that requires transit via Egypt - or a long journey around the Cape.
Keeping the Suez Canal open is a priority for any Egyptian government. If the canal were to be affected by sabotage or strikes, the impact on oil would be greatly outweighed by damage to world trade. Shipments of Asian goods to Europe would be interrupted, damaging the oil-hungry Chinese economy.
Meanwhile, West African supplies would be rerouted towards Europe, and Europe and the United States would release strategic stocks, designed exactly for such an eventuality. The US Strategic Petroleum Reserve's 727 million barrels alone could cover for Sumed and the Suez for more than two years.
So, while those who spin a story around market movements may be wrong in focusing on Egypt, oil traders are getting it right - a tale of short-term disruptions in Libya and Iraq signifying more than the fury in Cairo.
 
Robin Mills is the head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis and Capturing Carbon