Futures crude prices spiked early on Saturday, as the oil markets focused on the escalating political instability in Egypt and worried about the potential impact of a supply disruption there according to recent research by Societe Generale. It reported that ICE Brent crude surged by US$2 to over $99, while the NYMEX WTI jumped by $3 to almost $89.
The risks concern transportation of crude oil and refined products via the Suez Canal and the Suez-Mediterranean (Sumed) pipeline. Crude and products flow in both directions (north from the Red Sea to the Mediterranean, and south from the Mediterranean to the Red Sea) through the Suez Canal, with combined volumes averaging 1.8 million bpd in 2009, reportedly slightly higher in 2010. Crude flows north to the Mediterranean through the Sumed; volumes averaged 1.1 million bpd in 2009, again slightly higher in 2010. The bottom line is that around 3 million bpd of crude and products is at risk.
Societe Generale has said that it has not heard of any specific threats to the Suez Canal or the Sumed pipeline. The concerns in the oil market are, at this point, of a more general nature; there are even some worries that after having spread from Tunisia to Egypt, the unrest could eventually spread to key oil producers such as Saudi Arabia “an event we consider to be very unlikely”, the group’s commodities research team said.
“So far, the instability has been driven by mass “grassroots” protests. There does not seem to be any organisation by specific political parties or movements behind the uprising, though some recent reports suggest that the Muslim Brotherhood may be starting to, or hoping to, play an increased role. So far, the protests have also been mainly secular in nature, not Islamist, though this also could change,” the report said.
“The point is that without an organised political movement, we do not see the supply threat coming in the form of organised paramilitary attacks on the Suez Canal or the Sumed pipeline. Organised or semi-organised militias need financing, weapons, and training, and this does not seem to be part of the landscape in Egypt particularly with the Egyptian military both strong and firmly behind Mubarak. Rather, the supply disruptions are more likely to come in the form of labour strikes, which could shut down operations at the Suez Canal or the Sumed line.”
The research finds that there are several factors that offset the 3 million bpd risk. Firstly, OPEC currently has 4.9 million bpd of spare crude production capacity, of which Saudi Arabia has 3.5 million bpd. Secondly, industry stocks in OECD countries are comfortably high at 2.74 billion barrels of crude and products.
Thirdly, strategic crude and product stocks in OECD countries total 1.56 billion barrels, enough to maintain a 2 million bpd drawdown rate for two years. The report added that key non-OECD countries such as China now have significant strategic crude reserves as well which could cushion them from potential disruptions.
