Egypt grips the world of oil as price peaks at 14-month high

The country's political upheaval has driven prices high, but fundamentals underpinning black gold are weaker than ever

As Egyptians took the streets in their millions this week, it was not just the political temperature that was rising. The global price of oil gained progressively, day by day, peaking at 14-month highs in the US on Wednesday as the country's president, Mohamed Morsi, was toppled.

The BBC and other major rolling news networks breathlessly reported the rise throughout the night alongside their transmissions of the jubilant scenes in Tahrir Square.

But is it really such an issue? Should we really be braced for yet more costly petrol and manufactured goods? Was oil what the Bank of England had in mind yesterday when it talked of inflation rises ahead?

Probably not.

In the real world, the big commodities houses were treating the rise as a short-term blip – one of the many price spikes that has gripped the market over recent months.

Egypt itself is not a particularly big producer of oil – it is not even in the Opec cartel. But it is a major supply route thanks to the Suez canal and SUMED pipeline. The canal links the Red Sea and Gulf of Suez with the Mediterranean, while the SUMED provides capacity for cargoes too big to transit by ship.

Respectively, the canal transits about 535,000 barrels of crude northbound every day, and the pipeline accounts for about 1.7 million barrels a day, according to the Energy Information Administration.

Disruption of those supply routes would be bad news for the European and US markets who use most of the stuff, but is extremely unlikely unless the political situation spirals catastrophically out of control.

However, as Tom Pugh, commodities economist at Capital Economics, points out: "Nobody in Egypt would gain from attacking the canal or pipeline except from perhaps Islamic extremist terrorists."

Meanwhile, the relatively little oil and gas that is extracted in the country are in fields far removed from the urban flashpoints of potential violence and disruption – much of it offshore. While some western firms have ordered staff back home, local workforces are more than capable of taking up the slack.

No, far more concerning for the future price of oil is whether the unrest in Egypt spreads to other countries in the region with bigger reserves.

While it may be early days in the new regime's rule, so far there has been little sign of this happening, analysts say. Assuming the Egyptian army takes control with minimal bloodshed, we should expect to see prices drop back down in the coming weeks, possibly even days.

To guess the future for the oil price, it's crucial to bear in mind the underlying and longer-term dynamics of demand for Middle Eastern oil.

Clearly, the European economy is not going to be sucking up huge increases any time soon. Such is the decline in demand for oil in Europe that supplies from resource-rich Russia have fallen to a 10-year low, figures showed yesterday. Little wonder that Moscow is now increasingly looking to China for a home for its oil and gas.

Longer-term demand from the US is also likely to be crimped, even if the economy there does follow through on the early signs of an improvement. While all the talk has been of shale gas revolutionising the US energy markets, shale oil has also been a big discovery. US refineries are in a particularly sweet spot – they are able to use cheap shale gas to power their plants refining cheap shale oil.

In short, there's more than enough supply available to drive prices down at least as low as Capital Economics' $95 a barrel prediction.

As Mr Pugh says: "Two or three years ago people were calling Peak Oil. Now the US is producing more than it has done for 30 or 40 years."

I guess you could call that pouring oil on troubled waters.

Supplies: Routes to the world

Suez Canal

The Suez canal is perhaps Egypt's most important strategic focus for the world economy. It spans 120 miles, linking the Red Sea and the Gulf of Suez with the Mediterranean. Oil and petrol makes up about 15 per cent of cargoes, and liquefied natural gas around 6 per cent. The depth of the canal was extended to 66 feet in 2010 allowing even Very Large Crude Carriers (VLCCs) to pass.

SUMED

The SUMED (Suez-Mediterranean) pipeline is 200 miles long. It is used as an alternative to the canal, or by VLCCs that need to lighten their loads in order to navigate the passage.

Reserves: New discoveries

Oil

New discoveries have boosted Egypt's oil reserves from 2010 estimates of 3.7 billion barrels to 4.4 billion last year. That is still tiny compared with the big Opec countries. New extraction techniques have also helped revitalise some of the mature fields where production peaked in the 1990s.

Gas

Gas is likely to be a bigger driver for the energy sector in future years thanks to recent discoveries. Its proved reserves are now the third biggest in Africa, after Nigeria and Algeria, according to the Energy Information Administration. British companies operating in the gas market there include BG and BP.

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