Oil Prices: Egypt's Crisis Could Hurt Europe First

Oil tanker in Suez Canal
Oil tanker in Suez Canal

Some crude oil prices brushed $100 a barrel Monday as fears escalated that the violence in Egypt would spread to other parts of the oil-producing Middle East. But so far, no reports have surfaced that the disturbances in Egypt have disrupted oil deliveries.

Brent crude oil surged to $99.97 a barrel on London's ICE futures exchange, up about 5% since the beginning of last week, when violence spread from Tunisia to Egypt. In U.S. trading, West Texas Intermediate shot up 1.7% on Monday, but was still somewhat cheaper than Brent crude, its European counterpart.

Julius Walker, a senior analyst at the International Energy Agency in Paris, says the organization has received no reports that oil shipments were being delayed, but the website of the agency that runs the Suez Canal has been shut down by the ban on Internet use in Egypt, so a precise reading isn't available.

"Nothing has been affected. It's just the worry of it," Walker says.

A Chokepoint for Europe-Bound Oil

Egypt is a small oil producer, and its output is almost exactly equal to what its own needs are. The concerns at the moment, however, are the Suez Canal and the SUMED pipeline that runs parallel to the canal.

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Walker says the IEA reckons that 1.5 million barrels of oil a day pass through the canal and another 1.1 million barrels go through the SUMED. That's about 2.5% of world oil production.

Most of that oil goes to Europe because oil from such places as Saudi Arabia and Kuwait that goes to the U.S. is transported in so-called very large crude carriers capable of carrying 2 million to 3 million barrels of oil. Those massive tankers can't sail through the Suez Canal and instead go around the Horn of Africa.

Walker says if the Suez Canal were closed, it might add two weeks to the shipment times for oil reaching European refineries on the Mediterranean coast.

During the Suez crisis in the 1950s, the canal was closed by the Egyptians, who sank ships to block transit through the waterway. Crude oil shortages were widespread in Europe at the time.

Low Probability of Political Contagion

There seems little likelihood that will happen again. The major concern now is that the violence playing out in Egypt will catch fire in the rest of the Arab world. "The main risk is that of political instability spreading to Middle Eastern oil producers, such as Saudi Arabia," Goldman Sachs analysts said Monday in a research report. "Egypt's consumption and production are roughly balanced, creating little impact on oil supplies from the instability there. However, given the high level of affluence in the Gulf region, we see the probability of political contagion as relatively low."

Walker notes that oil prices were higher well before the crisis began in Tunisia earlier this month, moving from the $70- to $80-per-barrel range to around $90. U.S. gasoline prices are now at around $3.11 for a gallon of unleaded, up only two cents from two weeks ago.

Walker says the disconnect between Brent crude and West Texas Intermediate prices seems to have been caused by a big buildup of crude oil in the big Cushing, Okla., oil depot. That was caused by the arrival of vast amounts of crude from Canada, which pushed down prices in the U.S. to levels well below those in Europe. Still, if history has any lessons about oil supplies and prices, nothing can be taken for granted.