Revolutionary events in Egypt had an immediate effect on stock markets. Brent oil prices broke the level of $100 per barrel as early as on 31 January this year, for the first time since 2008. A swarm of analysts fell into a buzz right away - should we expect the black oil to appreciate more? Oil prices started rising because of the threat of closure of the Suez Canal believed by many experts to be our planet's main oil transportation artery. According to forecasts of the Ministry of Oil and Gas Industry of Kuwait, if there are any problems in the Suez Canal oil prices will soon exceed $110. So, this is question No. 1 for the global economic (to name one only) community.
However, news from the telegraph was surprisingly contradictory. 11 February - headlines "Oil Prices up on Egypt Crisis as Mubarak Clings to Power". 14 February - "Oil Prices Slip after Mubarak Resignation". 16 February - "Oil Prices Go Up Because of Thinning US Reserves".
What is actually happening in the oil market? Who prevails in the market - buyers or sellers? Why are oil pricing growing and what role does the Suez Canal play in global oil trade? Should we expect record price tags on the black gold? These are the problems that Market Leader analysts and experts of the Masterforex-V Trading Academy tried to sort out.
Forecasts: when and how much will oil prices spike?
The scandalous and, nevertheless, not the less respectable George Soros warned on 3 February that oil supplies from the Middle East region run the risk of being stopped. This subject was pounced upon by economists and brokers:
• the International Energy Agency believes that annual demand for oil in 2011 worldwide will reach 1.4 mln. barrels;
• the Energy and Oil Minister of Venezuela, R. Ramirez, warned that oil prices could be expected to reach a staggering level of $200 and demanded that an extraordinary OPEC meeting be convened urgently;
• respectable Barclays Capital does not rule out that oil might reach $250 if the Suez Canal is closed down. The company's analysts say that the market will stagger but withstand without liquefied gas that passes through the canal. Lack of oil, however, will be a disaster;
• Nouriel Roubini, who predicted the global crisis of 2008-2009 in due time, warned that a new global crisis was possible; According to his estimates, three out of five recent global recessions were triggered by unrest in the Middle East. The latest global crisis broke out not after the US economy collapsed in 2007, but after oil prices reached $148 in 2008;
• analysts remind that the Suez Canal and the parallel SUMED oil pipeline account for about 20% of global tanker transit of the black gold. From 50 to 100 large-capacity tankers pass the Canal every day;
• the west is overdependent on the Suez Canal. It is through it that Europe gets 50% oil from the Middle East (primarily, from Saudi Arabia, the largest oil producer in the world), the US - 30%;
• if the Suez Canal is closed, oil will have to be delivered in tankers around Africa, which means an extra 6-7 thousand miles and 10-18 days;
• there was an explosion on the gas distribution terminal in Al-Arish. It suspended gas deliveries from Egypt to Israel. Cairo committed itself to deliver gas to Israel as early as in 1979 based on a peace treaty between these two neighboring antagonist countries. The preliminary reason of the explosion - a terrorist attack intended to impair Israel-Egypt relationships;
• the Suez Canal is most likely to become an instrument for blackmailing the west if the mullah regime comes to power like in Iran. It is Arab sympathy with Egypt it its confrontation with Israel and the west it is supported by that triggered the fist oil prices spike in 1973 when they grew 3-5 times overnight (from $2-3 per barrel to $10-12 - these prices are now remembered with nostalgia) and pushed the entire western economy to the brink of survival. One should not forget that over 90% Egyptians triumphed at news of al Qaeda attack on the U.S. in 2001;
• political observers point out to the US 'inarticulate' position during public unrest in Tunisia and Egypt. Democracy set aside, America lost its most loyal allies in the Arab world;
• in China, the second largest (after the US) energy consumer, the inflation rate in January this year was 4.9% (against the forecasts of 5.3%). This is when oil imports to China added 27% early this year as compared to 2009.
Is the market in for a collapse because of the revolution in Egypt and closure of the Suez Canal?
However, there are analysts that aren't so pessimistic about the Suez Canal problem:
• blockade of the Suez Canal is a no-win situation for everyone: for the west that depends on oil deliveries, for oil producing countries whose wealth is based on exports of the black gold - Saudi Arabia itself sells up to 95% of oil it produces abroad;
• the Suez Canal is the major donor of the Egyptian treasury so the country objectively isn't interested in closing it;
• many European shipping companies stopped using the Suez Canal 2 year ago when Egypt suddenly increased fees for vessel passage through the Canal. As a result, revenues to the state budget generated by operation of the navigable main not only failed to increase - they fell 20%. Isn't this one of the main reasons behind the Egyptian revolution that no single western media writes about as experts suggest?
• oil in the global market started appreciating before events in Egypt and reached a very high level of $90 per barrel by early 2011;
• OPEC Secretary General Abdulla El- Badri stated that the cartel would increase oil production if there were any problems with the Suez Canal. This meant more oil could be produced in regions where deliveries are not connected with the Suez Canal;
• 1-1.5 mln. barrels of crude oil transported through the Suez Canal every day make up only 2.5 to 4.5 percent of global daily demand;
• some analysts point out that the role of the Suez Canal in the global oil transit isn't as big as it is believed. The Canal has many restrictions for tankers (draught of max. 21 m., width of max. 50 m., height of max. 64 m.) so only medium-displacement tankers are used to transport oil through it;
• every year the USA and Europe are becoming less dependent on the Middle East oil transported through the Canal. Since 2009 Saudi Arabia has not been the US main oil importer as it fell behind Nigeria and Mexico (who need no Suez): in 2008 oil from Saudi Arabia accounted for 17% of US total imports and fell to 10-11% in 2009;
• Saudi Arabia is shifting focus to the Far East which doesn't need the Suez Canal, either. China, Japan and other 'dragons' of the Pacific regions are becoming major buyers of Arabian oil. Saudi oil deliveries to China already exceed exports to the USA.
Is there always Plan B?
The west has been preparing for possible problems with oil deliveries since the first global oil crisis of 1973:
• Europe has been successfully implementing principles of the energy security policy for many years. According to it, no EU country should allow the share of one energy exporter to exceed 30% of total deliveries. Firstly, this demonopolizes energy supply chains. For example, Germany, the largest oil importer in Europe, used to get the black gold from two major sources - Saudi Arabia and Libya. In the 1990s Russia, Norway and Great Britain became the country's main suppliers (top ten exporters include only one Persian Gulf country - Saudi Arabia). Secondly, this implies diversification energy types - Europe is decreasing oil consumption and is increasingly more focused on gas and unconventional sources of energy. It is to this end that Nord Stream gas pipeline has been built from Russia. Soon, construction of new gas pipelines will start - South Stream from Russia, Nabucco from Azerbaijan, an underwater gas pipeline from North Africa;
• English and American companies are elaborating a construction project for the world's longest oil pipeline from hydrocarbon-rich Sudan - across all Africa to the Atlantic coast. If this global project comes off, the Suez role will diminish overnight in the world;
• the USA considers lifting the ban on oil and gas production on 80% of the country's continental shelf introduced as early as in 1981. It hides at least 100 bn. barrels of oil resources and America could additionally produce up to 3.5 barrels a day;
• the USA started using new drilling technologies on territories that used to be inaccessible. A new oil field in the west of the country will generate over 2 mln. barrels a day - more than production in the Gulf of Mexico. The new drilling method allows decreasing oil imports to the USA by over 50%. China is very interested and prepared to invest billions in this technology;
• the fleet of large-capacity tankers now lies idle. VLCC-type oil vessels can transport 2 mln. barrels of crude oil or twice as much as those that now pass the Suez Canal. Currently, there are about 500 VLCC tankers in the world. Another 60 are expected to be commissioned in the near future. I.e. they are enough to organize oil deliveries to Europe and the USA from the Persian Gulf, while their large capacity can compensate for, at least, in part, costs of the extended transit way around the Cape of Good Hope;
• one should also remember that the Mediterranean has the US 6th fleet, and navy ships of the European Union and other countries run around the Gulf of Aden to protect peaceful vessels from Somali pirates. The navy can use force to unblock the Suez Canal if there is a threat to peace.
What are the benefits for Russia
If the Suez Canal, nevertheless, stops operating as a transport artery, Russia will only additionally benefit from deliveries of its oil to Europe, the USA and other regions of the planet:
• Russia produces almost as much oil as Saudi Arabia (12% against 13% of global output, respectively);
• the country has potential to increase oil deliveries to Europe. It is through the Druzhba pipeline alone that Russia delivers up to 60 mln. tons of oil every year to Germany, Poland, Czech Republic and other countries;
• growing oil production in Sakhalin will allow Russia to increase exports of the black gold to Asia Pacific countries (up to 30% of total Russian exports);
• Russia has already become one of the largest importers for the United States. The ready oil pipeline East Siberia - the Pacific already pumps hundreds of thousands of oil barrels every day, and deliveries can increase. As estimated by Barclays Capital analysts, Russia can become the largest importer for the USA;
• reduced oil consumption will boost demand for Russian gas.
What tips do the stock exchange and its traders offer?
According to professional traders of the Commodities Derivative Trading Department within the Masterforex-V Trading Academy, next week prices will stop falling in the oil oil (WTI), and a certain rise in prices is possible in the short term supported by both results of the EIA reports and the situation in the Middle East. This week, there is no roaring demand for WTI (American oil) and Brent oil futures in the commodities market yet. So, there has been a flat for some time.
The Editor's Office of Market Leader and Masterforex-V Trading Academy experts hold a survey: should we expect a spike in oil prices in the context of the continuing public unrest in the Middle East and North Africa?
• yes, oil traders won't miss a change to feather their nests;
• yes, but for the short term. Later prices will fall to an acceptable level;
• no.
