Friday, February 4, 2011

Commodity: Egypt Protests Could Lead to $150 Crude Oil

Kent Moors writes: Egypt is hardly the most influential player in the global energy market. Crude oil production has been in decline there for nearly two decades. Since hitting its peak level of 941,000 barrels per day (bpd) in 1993, producion has dropped steadily – falling to 873,000 bpd in 1997, 696,000 bpd in 2005, and finally to about 685,000 bpd currently.

Of course, while Egypt may not produce very much of the world's oil and gas, it does control about 5% of the world's oil and gas delivery. For that reason, the Egypt protests have had a very pronounced effect on the global energy market. The price of oil futures traded on the New York Mercantile Exchange (NYMEX) remain above $90 a barrel, while London Brent Crude has traded above $100 a barrel for two days.

Aftershock No. 1: Panic Over Instability
First, while Egypt itself does not directly provide a great deal of oil to the international market, any instability in this region causes oil traders to panic. (The hefty rises in oil prices on Friday attest to this fact.) Prices are now stabilizing – after a quick round of profit-taking – and will soon begin experiencing upward pressure again (primarily for the reasons I will summarize below). Keep your eyes on the Brent crude price in London, where the importance of what is happening on the streets of Cairo is more immediate. The price of Brent crude has topped the magic benchmark of $100 a barrel for two days running.

There are no indications that the unrest is likely to translate into a government takeover by radical groups. We are, of course, still quite early in the process, but Egypt remains a secular Islamic state, at least for the moment. True, this is the birthplace of the Muslim Brotherhood some 60 years ago, the forerunner of radical Islam. However, these days, it is poorly organized, without effective leadership, and significantly weakened by government pressure over the years. In any event, this is currently a popular uprising and bears little relationship to wider political issues – unless, of course, we assess its result to the broader region. The events unfolding, first in Tunisia and then in Egypt, have brought attention to the unstable hold governments throughout the region have on their nations.

Here is where the true problems may result.
Egypt, Turkey, and Jordan are the leading secular Islamic states in the Middle East. But they have only moderate amounts of oil and gas. More disconcerting is the possibility of reactionary elements gaining control in places that have a more immediate impact on the flow of energy.

Aftershock No. 2: Western Producers and Drillers Could Suffer
Secondly, Egypt has been increasing its development offshore, especially of natural gas in the Nile Delta, the Gulf of Suez, and the deeper waters of the Mediterranean Sea.

Here, there are assets of major Western companies at stake – BP PLC (NYSE ADR: BP), Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), Royal Dutch Shell PLC (NYSE ADR: RDS.A), Eni SpA (NYSE ADR: E), British Gas Group PLC (OTC ADR: BRGYY), Edison SpA Milano (OTC ADR: EDIHF), and dozens of mid-sized companies. In addition, there are substantial assets of leading drillers, including Transocean Ltd. (NYSE:RIG), Diamond Offshore Drilling Inc. (NYSE:DO), and Baker Hughes Inc. (NYSE:BHI). What to watch here is the response to political pressures on the two dominant Egyptian state companies – the Egyptian General Petroleum Corp. (EGPC) and the Egyptian General Gas Holding (EGAS). These two control the dominant state position in all hydrocarbon projects in the country.

Aftershock No. 3: Eurozone Electricity Prices May Fluctuate
Developments there – should they lead to any interruption in deliveries – will have a more pronounced effect on the European gas market. The discovery of large gas deposits over the past several years has catapulted Egypt into the fast track lane for liquefied natural gas (LNG) exports to the European Union. Any problem on this front would change dynamics in LNG imports and provide instability in electricity prices on the continent.

Aftershock No. 4: Delivery Interruptions Bring in Serious Volatility
Finally – and, in my judgment, most significantly – while Egypt does not provide a great amount of the global oil and gas, it does control about 5% of its delivery. Some 1.8 million barrels of oil move through the Suez Canal each day; another 1.1 million or so barrels pass along the Sumed pipeline from the Gulf of Suez to Alexandria and further export. Any interruptions here would move the oil market into considerable volatility, requiring a rebalancing of contracts and a noticeable escalation in prices.

Here's the rule of thumb to remember: Each 1% decline in global supply availability without an equivalent decline in demand pushes average crude oil prices up $10 a barrel. At minimum, therefore, that would translate into an almost overnight price level of $140 a barrel on the NYMEX and a Brent crude price of nearly $150 a barrel. Currently, the only problems in the Suez Canal are a result of communications being subject to government cuts countrywide. There is no indication that the oil flow is impeded at this point.
But this is a fluid situation, and the likelihood of supply cuts elsewhere in the region as the popular uprisings increase, are a genuine concern.

[Editor's Note: Dr. Kent Moors, a regular contributor to Money Morning, is the editor of The Oil & Energy Investor, a newsletter for individual investors, as well as the Energy Advantage advisory service In a career that spans 31 years, Dr. Moors has been consulting the energy industry's biggest players, including six of the world's Top 10 oil companies and the leading natural gas producers throughout Russia, the Caspian Basin, the Persian Gulf and North Africa. His experiences - as well as his unrivaled industry access - are without peer. For access to Dr. Moors' top stock recommendations for the publicly traded companies that are poised to dominate these new clean-energy markets, get his Energy Advantage advisory service by clicking here.]

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