Recent rises in oil prices to around $100 a barrel because of the events in Egypt are not justified by the current situation of the oil market. There is balance in supply and demand, even if OPEC countries produce at their maximum levels, with the exception of Saudi Arabia, which always retains a surplus production capacity of 1.5-2 million barrels a day. Its oil minister affirmed that it now has 4 million barrels of excess, unused capacity, while the United Arab Emirates and Kuwait also currently have a bit of extra capacity as well.
Even Iraq has seen an increase in its production over the last three months; its oil clients have noticed that the country has quickly developed its fields and is now asking them to send supertankers to carry the oil. Only recently, Iraq was asking them to wait because the oil was not available. The petroleum industry has noticed that Iraq’s production in the last three months has reached approximately 200,000 barrels a day.
The fears of a closure of the Suez Canal because of the events in Egypt are an element with a big impact on prices, in addition to two other factors that were pointed out by Saudi Arabia’s oil minister, Ali al-Nuaymi, on Monday in Geneva. These are the weak value of the dollar and the desire by speculators and investors in futures markets to test a new price level.
In reality, speculators in futures markets have a very big impact on the fears of geopolitical events, especially when it concerns methods of transporting oil. The fear of a Suez Canal closure is a big factor for speculators. There are more than 3 million barrels a day crossing the Suez Canal and the Sumed pipeline, which begins in the Gulf of Suez and ends in the Mediterranean. These quantities of oil pass every day through Egypt, representing 3 million out of a total of 80 million barrels of world demand for oil.
However, the possibility that the canal will be closed is unlikely, because it is under the authority of the Egyptian army. According to oil industry insiders, the work on loading cargoes, and the work teams on board ships, are moving slowly, due to the events, and this delays the loading of trucks and the rotation of work teams on the ships. Certainly, this will boost fears that are often fed by investors, who resort to investing in future oil markets, as well as those who invest in the dollar, which has seen a drop. In addition, they resort to fears about the closure of the Suez Canal, which could mean that shipments of crude oil to Europe and the United States will have to take a detour around the Cape of Good Hope in Africa, requiring an additional 15 days to arrive at their destinations.
It is very unlikely that the Suez Canal will be closed, as it is the primary financial outlet for Egypt’s economy. The country is seeing huge demonstrations calling for changing the regime, but these demonstrations are unlikely to lead to the canal’s closure. If something unexpected like this happens, it will also greatly affect natural gas markets. Egypt is a source of liquefied natural gas (LNG) and transporting oil might take more time; the time needed to transport oil might grow, along with the number of ships standing in the canal, at a time in which more are needed.
It is true that the conditions that led to the oil price rise of 2008 have changed. It is also true that there is no shortfall in supplies. However, psychological fears about geopolitical events could drive prices up to levels that no one wants, and which are outside the control of OPEC. As long as Egypt is unstable, and people fear the protest movement will move to other countries such as Algeria and Libya after Tunisia, oil prices will continue to rise because these countries are not isolated from such events. Even if the supplies are there, the fears play a big role in terms of speculation and futures markets.