Egyptian Unrest Pumps Oil Higher

03.07.2013 - 22:04

The price of crude oil traded above $102 a barrel on 3 July as Egypt teetered on the brink of civil war and traders feared tensions could spread to the broader Middle East and North Africa -- home to about a third of the world's oil production. In London, Brent crude was at $105.31 a barrel on the ICE Futures exchange.

While oil production from Egypt is very small, Cairo controls the Suez Canal and pipeline.

Some 20 armoured vehicles and personnel carriers have been deployed in the vicinity of a local mosque in Suez and several military helicopters are hovering over the city and the Suez Canal, Ahram reported.

The political situation in Egypt is raising fears that the crisis could lead to a disruption in oil deliveries and higher prices if the Suez Canal is blocked, Justin Urquhart Stewart, the director of Seven Investment Management in London, told New Europe on 3 July. He added that it could have a border impact on the Middle East which has got other issues to manage at the moment.

However, Urquhart Stewart noted that there is still the question of China slowing down. “Therefore, in theory demand shouldn’t be that good. But there has been a constriction because of the Iranian exports being so far down,” he said. “Egypt can also have a significant impact. Is the oil price going to go up to the level we saw before last year? The answer is, ‘no’ – that’s unlikely. But were you had a market of looking pretty weak in the last few weeks. That’s now firmed up and it is able to stay there for some time.”

Urquhart Stewart said the situation in Egypt is highly uncertain. “We’re now hearing of a potential coup in Cairo,” he said. “The level of unrest is going to cause further nervousness in the market and will keep the oil price up,” he said. “And if there is civil war and you end up with the canal being closed that has a much broader implication overall. But this is just exactly what we didn’t want to have happen. And you have Syria filling a very dangerous situation. Iran - I’m not sure how this is going to be moving at the moment. And within the EU you have the question over Portugal this week as well. All of this is adding to a very unpleasant recipe for the weekend,” Urquhart Stewart said.

Egypt’s ailing economy is at the heart of the unrest. Fuel shortages have caused long lines for months in Cairo. “I’m afraid Egypt is going to have a very tough year, indeed. This is not going to end up in a smooth transition because the president’s supporters are still very strong as well as the opposition and there is no easy way out of this,” Urquhart Stewart said, adding that even military control leading to a technocratic government could still cause “an awful lot of disruption because the economy is still in a very weak state”.

Meanwhile, the boost in oil prices is in line with Russia’s economic interests. Chris Weafer is senior partner with Macro Advisory in Moscow, wrote in an e-mailed note to investors early on 3 July that Egypt, Syria and Iran help balance the Russian budget. “The threat of an escalation in Egypt has further boosted the price of crude to a price which is close to breakeven for the federal budget,” he wrote.

“The price of Brent (and Urals) bucked the weaker trend recorded elsewhere in commodities, rising 1.8% for the month and cutting the decline since the start of the year to around 8%. The reason is the that the protests in Turkey, the continuing violence in Syria and Iran’s commitment to its nuclear programme have boosted the risk-premium faster than the demand and dollar concerns have hit sentiment in the sector,” Weafer wrote.