Tensions in Egypt help drive crude oil prices higher

Courtesy of JSOnline.com by John Klein: Political upheaval in Egypt is likely to send gasoline prices higher in the next few days, but market watchers expect the price hikes to be temporary and not something that will last all summer.

On Wednesday, crude oil prices shot upward as the Egyptian military was removing that country’s president amid protests by millions of citizens there.

“I’m not an expert on Egypt, but in this type of a situation, the markets tend to thrive on uncertainty and they tend to factor in a worst-case scenario,” said Jim Ritterbusch, an oil industry analyst who owns Ritterbusch and Associates in Galena, Ill. “The worst-case scenario here is all of this civil upheaval could impact crude oil flows.”

That scenario was priced in by the market during the past couple of days, as oil zoomed up to $102 a barrel at one point from $98, he said.

Crude oil for August delivery on Wednesday gained $1.64, or 1.6%, to close at $101.24 on the New York Mercantile Exchange. Oil has not closed above $100 since May 3, 2012.

Brent crude, which is used to price the oil used by many U.S. refineries to make gasoline, increased $1.76, or 1.7%, to end the session at $105.76 a barrel on the London-based ICE Futures Europe exchange.

Oil traders were pricing in the possibility that the unsettled situation in Egypt could slow the flow of oil from the Middle East.

Egypt is not an oil producer but its control of the Suez Canal, one of the world’s busiest shipping lanes, gives it a crucial role in maintaining global energy supplies. The Middle East accounts for about a quarter of the world’s crude oil output, or 23 million barrels per day. About 2 million barrels of that, or 2.2% of world demand, are transported daily through the Suez Canal, which links the Mediterranean with the Red Sea. Much of that oil is headed to Europe, but a supply drop anywhere in the world leads to higher prices everywhere.

“My own opinion is the (Egyptian) military is strong enough, one of their primary interests would be in protecting the canal,” Ritterbusch said. “I think odds are slim that you would see any disruption of supply over there.”

But that doesn’t stop oil market traders from sending prices higher, especially during a holiday week in the United States when trading tends to be thin and even small bits of news can cause exaggerated price swings.

“Each time there is a bit of confusion in Egypt there will be calls that a geopolitical premium needs to be added to oil because of the risk to the Suez Canal,” said Olivier Jakob of Petromatrix in Switzerland. “But if there is one thing that the military has control of in Egypt, it is the Suez Canal. We therefore do not see a significant risk for free passage on the waterway.”

It’s not just Egypt that is driving prices higher. “We still have Syria to contend with, and Libya to contend with, and Iran to contend with,” Ritterbusch said. “It’s kind of a long list of hot spots where anything could flare up at any time.”

The rising price of oil could end what has been a streak of 21 days of lower U.S. retail gasoline prices. The average U.S. retail price fell less than a penny Wednesday to $3.48 per gallon, according to AAA’s Daily Fuel Gauge Report. In Wisconsin, the price per gallon for regular averaged $3.45. In metro Milwaukee, the average price was $3.41 and in Madison, it was $3.40. In Green Bay, the average was $3.49, and Eau Claire was at $3.58. In Chicago, the average was $4.12 and in Minneapolis/St. Paul, the average was $3.31 a gallon.

Analysts do not think the spike in oil prices will lead to significantly higher gasoline prices long term because U.S. crude supplies remain high and refineries are turning out plenty of gasoline.

“At the end of the day, we’ve got plenty of gasoline in this country and we have plenty of diesel fuel,” Ritterbusch said.

Short term, he expects pump prices to rise, then fall back by the end of July.

If we do see a price rise, “it won’t be there long,” Ritterbusch said. “Hopefully, that would set the stage for a move back down to the mid to high $90s,” per barrel.”

Meanwhile, the Energy Department reported Wednesday that U.S. crude supplies fell by 10.3 million barrels from the previous week, more than three times the drop that analysts had expected. The drop was likely the result of reduced supplies from Canada because of a temporary pipeline shutdown there, as well as increased demand from a BP refinery that restarted in Indiana.

Refineries in the U.S. are running at 92% capacity, Ritterbusch said. That’s above the average of 89% capacity during the past five years.

“That portends a larger supply of gasoline,” and potentially lower pump prices, he said.

For consumers, “Fill up now and a week down the road, I think the whole dynamic begins to shift,” he added.

Gas prices typically rise in late winter or early spring when refineries perform maintenance and switch from making winter gasoline blends to the more complex summer blends required for clean-air rules such as those in place in southeast Wisconsin. When the nation’s refineries aren’t operating at full strength, supplies drop and prices rise. Once the maintenance is done, output rises and prices fall.

“It’s a very shallow distribution system, quick to fill and quick to empty,” said Tom Kloza, chief oil analyst at GasBuddy.com.

Regional spikes and plunges are likely to happen more often in coming years. The number of U.S. refineries has shrunk by a quarter since 1993 to 143, but the nation’s refining capacity has grown 18% since then. The remaining refineries are getting bigger, so if one goes down, it’s a bigger shock to the system.

The Associated Press and Bloomberg News contributed to this report.

Category: Featured, Fuel & Oil, General Update