Conclusion: Brent oil broke the $100 barrier today, with little fanfare except to those European consumers who buy gasoline created from Brent. Additionally, despite a strong couple of months for Brent, it continues to trade higher suggesting political upheaval in the Middle East may be poised to accelerate.
Globally, oil is up as much as 3% today on the back of accelerating tensions in Egypt. As it relates to global production, Egypt is not a meaningful player. The country produces ~650K barrels of oil per day, which is roughly in-line with its domestic consumption. The key oil supply and demand factor relating to Egypt to focus on is related to transportation.
The Suez Canal links the Mediterranean and Red Seas and is considered to be one of the world’s chokepoints for energy. It is estimated that more than 35,000 ships travel through the Suez Canal every year and that approximately 10 percent of those are petroleum tankers. In recent years close to 2MM barrels per day of oil has been transported through the Canal, which is about 2.5% of the world’s daily oil consumption.
Given that the Suez Canal is located in Egypt, there is some risk that accessibility to the Canal could change with a less stable regime in place in Egypt. Or, alternatively, as tensions escalate and are prolonged in Egypt, shipping companies may be less willing to utilize the Suez Canal. As it relates to the last point, we have already seen global shipping companies begin to back out of Egypt. Earlier today Danish shipping and oil conglomerate, A.P. Moller-Maersk, suspended its port terminal operations and closed its shipping offices located in Egypt.
Since the Middle East, via the Suez Canal, is a key supplier to European oil markets, it is no surprise that we are seeing, and have seen, the price of Brent Oil accelerate upwards. As highlighted in the chart below, Brent recently surpassed $100 per barrel. This is more than an $8 premium above West Texas Intermediate (WTI). In effect, the demand for Brent Oil (it is sourced in Europe from the North Sea) increases with the perception that oil coming from the Middle East to Europe will be costlier to ship.
Interestingly, both Brent and WTI were at roughly $85 per barrel on December 1st, 2010. Since early January, Brent has outpaced the price performance of WTI dramatically and correctly predicted the acceleration of popular upheaval in the Middle East. Despite Brent being up more than $15 in the last two months, the price increase is still not abating, which suggests the issues in the Middle East may get worse before they get better.
Daryl G. Jones