Oil price risk: Egypt dejà vu

After weeks of grassroots campaigns, mass protests in Egypt erupted over the weekend, where as many as 14 million people were said to have taken to the streets demanding the resignation of elected President Morsi of the Muslim Brotherhood. On Monday, the army issued a 48-hour ultimatum to the government to find a resolution to Egypt’s political crisis. Today, President Morsi and the government rebuffed the army’s ultimatum saying it was “not consulted” and that it could “cause confusion in the complex national environment”. Two and a half years after the Arab Spring erupted in Egypt resulting in the ousting of President Mubarak, political chaos has returned to the nation. As the most imminent danger for the oil market, the demonstrations are firstly sparking concerns about the security of the strategically important Suez Canal chokepoint and/or interference with the Suez-Mediterranean (SUMED) pipelines transporting around 2.4m b/d (two parallel pipelines).

The SUMED pipeline and the Suez Canal are important transit points for oil and liquefied natural gas (LNG) shipments from Africa and Persian states to Europe and the Mediterranean Basin. Fees collected from operations of these two transit points are significant sources of revenue for the Egyptian government. Thus, both the Suez Canal and the SUMED pipeline are strategic targets for strikes or attacks against the government.

In 2011, 17,799 ships transited the Suez Canal of which 20% were petroleum tankers and 6% LNG tankers (EIA). Total oil flows through the Suez Canal reached almost 2.2m b/d in 2011, but this is still below the levels seen before the financial crisis and global recession in 2008/09. The decline in transits over the last years also reflects the changing dynamics of international oil flows. Increasing demand from Asian countries especially China, the shale revolution in the US and falling demand from Europe have redirected oil flows from west to east. Security issues and piracy activity around the Horn of Africa have forced shipowners to take the longer route around South Africa to reach the West African oil markets at the expense of routes passing the Suez Canal.

Suez Canal and SUMED pipeline

Source: US Energy Information Administration

A temporary shutdown of the Suez Canal would have the biggest effect on the crude, petrol and middle distillate markets in the US and Europe as around 470k b/d of crude, 420k b/d of petrol and 200k b/d of middle distillates were shipped through the Suez Canal in the northbound direction (PIRA figures from 2010).

A temporary shutdown of the canal will redirect the shipping traffic the long way around Africa, pushing up freight costs and increasing the delivery time.

The SUMED pipeline is the only alternative route to transport crude oil to the Mediterranean Sea from the Red Sea. A temporary closure of the Suez Canal and/or the SUMED pipeline would add around 6,000 miles to transit and could have a dramatic impact on tanker rates and oil prices. The crude and product supply routes would be extended by around 8-10 days to Europe and 15 days for transport to the US according to the IEA. The longer voyage will cause a significant build in in-transit inventories and increasing tanker demand. Delayed loads and losses to the oil market and increasing transportation costs will push up the price of crude oil and products as well as the longer-haul routes will increase demand for bunker oil to fuel the ships. The fear that Egypt would close down the Suez Canal at the outset of the Arab Spring in 2011 pushed up oil prices by around USD 7/barrel.

Egypt is the largest oil producer on the African continent which is not a member of the OPEC and the second-largest natural gas producer after Algeria. The country’s oil exports are limited, only 114k in 2012, as most of the oil is consumed domestically. Thus the crisis in Egypt is first and foremost a big threat to the oil market as an important transport chokepoint and not as a supplier of oil and natural gas to the global markets. A shut-in of the country’s oil production would need to be replaced by increasing production (a cut in OPEC spare capacity) from other oil suppliers and cut down on OPEC’s (the world’s) spare capacity buffer. This will in turn put more pressure on the world’s supply/demand balance and thus increase the risk premium in oil prices in the short term as the oil market starts once again to worry about the spill-over effects if the protests spread to the oil-producing regimes of the Persian Gulf. The Persian Gulf accounts for around 30% of the world’s oil production and controls around 56% of the proven reserves.



Latest research

Swedish Morning Briefing - Monday July 28

Europe’s debts at record level Higher rating for Portugal

While you were busy ...

If you are just back from holiday, here are a few bullets on what happened while you were busy …

Euro Rates Update

The latest Euro Rates Update is now available

FI Eye-Opener: Prepare for a big week

Bonds rally again ahead of the weekend, but core yields to creep higher today. Equities under pressure on Friday. German Ifo disappoints – UK growth still strong. The surge in LTRO repayments not repeated. Portugal receives good news from Moody’s. What is with Germany and a tighter EU? A huge week ahead: the Fed, US GDP, Euro-zone inflation and payrolls. Italian & US auctions and plenty of coupons and redemptions.

RUB: Central Bank decided to raise the key rate, inflation is in focus

Today Bank of Russia Board of Directors decided to raise the key rate by 50 b.p. to 8%. RUB may find support, but geopolitics will remain the focal point for the Russian currency market.

Week Ahead: 26 Jul - 01 Aug 2014

Big week in the US with GDP, Fed, ISM and payrolls. Flash estimates on July inflation will be out for the Euro Area and ECB will publish the Bank Lending Survey on Wednesday. In Norway the labour market will be in focus. Sweden will be out with both PMI and GDP Q2 (early estimate)

Preliminary Prepayments

Preliminary Prepayments

UK: leaving previous peaks behind

Strong GDP growth continued in the UK economy in Q2, with growth coming in at 0.8% q/q, in line with expectations, which was enough to lift the y/y rate to 3.1%, the highest since the last quarter of 2007. On a q/q basis, growth has been running at 0.7-0.8% for five consecutive quarters already, a remarkably stable performance.

Germany: Ifo decline once again highlights external vulnerability

The manufacturing motor sputters but growth is not over.

Sweden: retail sales and lending; households getting more confident

Strong retail sales. Continued increase in household lending.

Swedish Morning Briefing - Friday July 25

Japanese CPI up 3.6% in June Swedish retail sales due at 9.30

FI Eye-Opener: Bulls to strike back today

Yields headed higher on both sides of the Atlantic yesterday. Buying of core bonds to resume today, as concerns over Ukraine/Russia continue. S&P 500 squeezes another high. Market impact from positive PMIs likely short-lived. US economic data mixed. Busy Friday ahead: UK GDP, Ifo, Euro-zone credit data, Russian ratings. Another sizable LTRO repayment to put some upward pressure on the short end.

IDR: Jokowi win paves way for strengthening

The official election result is out and Indonesia has got a new president, the popular Jokowi. This is already priced in the market so IDR will be range-bound for now. It would be IDR positive in a longer perspective, if he succeeds in promoting growth and improving standards of living.

Euro area: PMIs offer hope amidst gloomy headlines

The flash PMIs for July point to a continued recovery in the Euro-area economy. Positive development in sentiment indicators is certainly welcome at a time, when the effect of e.g. the Ukrainian/Russian crisis is weighing on the economy. It is worth remembering that the numbers are unlikely to capture the recent escalation in geopolitical tensions, but the latest weakening of the euro and the ECB’s June easing package, on the other hand, are supportive of the Euro-area economy.

Sweden: Same old story in unemployment

Unemployment bounced back somewhat in June after the stronger than expected reading in May. Seen over the last two years, it is very hard to spot any clear trend downward in unemployment, despite the clear trend upward in employment. Today’s number did not change this overall picture and the expected, future decrease in unemployment seems to continue to be very gradual.

Swedish Morning Briefing - Thursday July 24

South Korea presents stimulus package Reserve Bank of New Zealand lifts policy rate

China: Good PMI no guarantee for growth outperformance

The Chinese economy is currently in a cyclical upturn. But the long-term perspective has not changed. The economy will continue to readjust to the new normal, meaning that a significant pick-up of growth is unlikely.

FI Eye-Opener: Reaching for the stars

German bonds take back earlier losses – yields to creep higher today. S&P 500 just manages to rise to new highs. China’s economy picks up steam. Bank of England not unanimous for too much longer? Russian sanctions on the agenda again. Euro-zone PMIs set to rebound.

BoE minutes: First hike getting closer, but not around the corner yet

BoE minutes showed a unanimous monetary policy decision at the July meeting, but the differing views about the outlook are starting to emerge. The modest wage pressures mean that the Bank is not in any hurry to start to raise rates, and the first rate hike is not around the corner. The August monetary policy meeting and the inflation report will be interesting.

Swedish Morning Briefing - Wednesday 23 July

EU to limit Russian access to capital markets Minutes of BoE meeting due at 10.30