Brent Breaks $100 as Unrest in Egypt Alarms Oil Market

The world returned to $100 oil on Monday, as the ICE Brent contract eclipsed that barrier on fresh geopolitical worries. European benchmark Brent, along with the more widely traded New York Mercantile Exchange (Nymex) crude contract, made strong moves upward at the end of last week, and the momentum rolled over to Monday, largely because of continued anxiety about the political stability of Egypt. Even though the situation has yet to impact oil supplies, there are concerns that the turmoil could lead to reduced traffic flows through the Suez Canal or Sumed Pipeline, increasing travel time for crude and oil products headed from the Gulf that would be forced to take the long route around Africa's Cape of Good Hope to get to Atlantic Basin and Mediterranean markets.

Roughly 1.6 million barrels per day for crude and products move through the Suez Canal into the Mediterranean Sea. Egypt, while not a major oil supplier, still pumps some 700,000 b/d of crude and NGLs as well as significant amounts of natural gas. Analysts worry that the recent political turmoil, which started in Tunisia before embroiling Egypt, may also spread throughout the world's biggest oil-producing region. Massive protests of a similar nature also occurred in Iran in 2009 after a disputed election contest, but failed to hurt oil supplies.
Saudi Arabia -- the world's top oil exporter -- sought to calm markets on Monday. The kingdom has more than enough oil at the ready, should there be a need for it, Oil Minister Ali Naimi said. Riyadh's spare capacity stands at nearly 4 million b/d, about double believed policy to keep at least 1.5 million-2 million b/d in reserve to cover a loss of Iranian exports. The Saudi oil minister also said oil's rally has little to do with supply and demand, rather being driven by gyrations in the dollar and market plays by traders. He reasserted the kingdom's moderate outlook on prices. "A range of $70-$80 is an appropriate price for oil because it encourages additional supply without damaging consumers," he told an industry conference in Geneva.
Opec Secretary General Abdullah al-Badri said the producer group would act if shipments through the Suez Canal or Sumed pipeline -- both key for Mideast oil headed West -- were affected. "We will increase production if there is a physical shortage," he told reporters in London, stressing that Opec has a long-standing duty to "balance the market."
The news coming from Egypt has sent investors into the oil futures markets, as players bet on higher prices. Traders set an activity record on Friday with a volume of over 1.47 million contracts of the Nymex crude contract, besting the previous high set in April, according to the CME Group. Daily options also reached a record of 290,365 contracts. Meanwhile, the London-based Intercontinental Exchange said that trades of its light, sweet crude contract set their own record with 496,165 contracts changing hands. The CME Group added that the average daily volume of Nymex crude contracts traded in January stood at 891,646, up 56% on a year-on-year basis, signify the high level of investor appetites.
The market's reaction to Egypt came at a time when investors were beginning to sour on the market because of bloated inventories, high spare capacity and economic concerns, especially in Europe. Speculative traders sold off hard the week before. The US Commodity Futures Trading Commission (CFTC) said that money managers -- the term it uses to describe speculative traders such as hedge funds -- held 155,487 net long contracts for the week ending Tuesday, Jan. 25, down 19% from the previous week. Traders dumped 31,147 long positions while adding 4,569 shorts, moves that reflects bearish sentiment.
Brent's eclipsing of the $100 barrier before the Nymex crude contract -- which is some $8-$9 under its European counterpart -- in part reflects the growing importance of the emerging economies in Asia, whose growing thirst for crude has shifted attention away from the US market. Volumes of traded Brent contracts have averaged 506,722 per day for the month of January, far exceeding any other month on record. Analysts have said that a variety of funds have jumped into the Brent marketplace as non-direct oil investors have realized that Brent is perhaps a better indicator of the global market. The Nymex crude contract being delivered into a landlocked Cushing, Oklahoma makes it basically untied from the global market.
Much of the growth in consumption is coming from Asia, Naimi said, and up to 70% of the kingdom's oil sales are now directed toward Asia and the Middle East. "That is a natural shift -- that is where economic growth is happening, so that is where the oil supplies will move," he said. "The next 20 years or so, the market will be in Asia and that's what we -- Saudi Arabia -- are focused on."
The shift to the East of Suez market has changed oil-market logistics significantly and in the process reduced the importance of the Suez Canal and Sumed Pipeline to the global market. Demand in Europe and the US is a much smaller proportion of the global market today than it was in 1956 or in 1967 when politics last hit the Suez in a big way. The impact now is related to the indirect effects of the crises on general Middle East stability.
If the geopolitical concerns cause oil prices to continue rising, al-Badri did not rule out the possibility of an emergency Opec meeting. He said he did not know if the crisis would be discussed in Riyadh later in February, when most Opec ministers are due to gather for an International Energy Forum meeting.
Egyptian protesters are today planning to organize a "march of a million" to get President Hosni Mubarak to quit after 30 years in power. But rather than copy his Tunisian counterpart, Zine el-Abidine Ben Ali -- and flee -- Mubarak seems determined to cling on to power, promising political reform and announcing a new cabinet. Field Marshal Hussein Tantawi has been kept on as defense minister and Ahmed Aboul Gheit as foreign minister, while retired police general Mahmoud Wagdi was named interior minister and Samir Radwan finance minister. Sameh Fahmy remains oil minister.
So far, the Obama administration has demonstrated a cautious, "take-it-slow" approach toward Mubarak. The White House is trying to strike a delicate balance between its desire for stability in Egypt with the Egyptian people's demands for serious political reform. Calls for Mubarak to listen to the Egyptian people and quickly implement major reforms have gradually escalated to something more serious -- albeit still vague. On Sunday, US Secretary of State Hillary Clinton urged the start of an "orderly transition" to bring about a "democratic, participatory government" in Egypt, while stopping short of calling for Mubarak’s ouster.
Amid continued fears that the unrest unleashed by Tunisia will spread across the Arab world, Saudi Arabia's King Abdullah on Saturday delivered one of the strongest defenses of Mubarak yet.
"Egypt is a country of Arabism and Islam. No Arab and Muslim human being can bear that some infiltrators, in the name of freedom of expression, have infiltrated into the brotherly people of Egypt," the king told the embattled president in a phone call. Saudi Arabia offered refuge to Tunisia's Ben Ali earlier this month.