There have been several reports that the recent uptick in oil prices is because of the uncertainty about the political situation in Egypt. What is confusing, though, is that the country only produces about 730,000 barrels per day and is a net importer of about 60,000 barrels per day. So how can a country with such paltry production be a critical cog in the global markets? Let's take a look what Egypt means for the oil industry and how it affects you and your energy investments.
See you at the crossroads
The global oil market is, and will potentially always be, a tight market. In 2012, global consumption outpaced supply by only 30,000 barrels per day. This means that whenever there is a threat of a major slowdown in production, someone is going to go without oil, or they will pay more than someone else to get it. This ripple effect reverberates throughout the global oil market and results in higher oil prices across the board.
We saw a very similar situation to this just over two years ago when Libya was on the brink of civil war. During the run-up to the conflict and into the first couple months of fighting, Brent crude prices surged by a third in a six-month period.
Much like what we saw with the Libyan conflict, Egypt's oil production may not be too much of a concern in the long run. OPEC member nations have over 5.76 million barrels per day in spare production capacity that is left idle to maintain high oil prices. So if this event poses a big threat to global supplies, it can be covered.
But Egypt is unique. Not because of its oil, but because of where it is located. The Suez Canal runs right through the Sinai Peninsula and is quite possibly the most important shipping route in the world. This region isn't just important because of the ship traffic that travels through the canal, but also because of the adjacent SUMED pipeline that moves oil from the Red Sea to the Mediterranean. Between shipping and the pipeline, the region can move up to 3.2 million barrels per day. Without this critical shipping route, oil tankers will need to travel all the way around Africa to deliver Middle Eastern and Pacific crudes to Europe and the U.S. This would add up to 15 days to deliveries for some regions, which will have an effect on prices for both Europe and the Americas.
Unrest in your portfolio?
Aside from the fear of higher gas prices, investors might be interested to know what kind of effect this will have on their portfolios. For producers that don't have assets in Egypt, this could potentially provide a little boost because they might get a slightly higher premium for their product. Then again, there are a couple companies that could be hurt by production losses from their Egyptian assets.
|Company||Total Production in Egypt (bpd)||% of Company's Production|
|Royal Dutch Shell||100,000||2.8%|
Of the four companies listed, Apache has the most to lose. Not only is Egypt the largest producing country for Apache, it also represents 27% of the companies worldwide production revenue, so any sustained period of uncertainty could drastically hurt Apache's bottom line. So far, BP has pulled expatriate staff from the country, but no company has announced a shut down of production or a full withdraw from the country yet.
The sting for each of these companies will depend on if and how much production slips during this turmoil. Based on recent events like this in the Middle East, it could have little to no effect or could shut down operations for several months. In 2011, when former president Hosni Mubarak was removed from power, there was little to no effect on oil production. Since that time, though, production has tapered off as the economy in Egypt has struggled and some companies have been hesitant to invest there because of political uncertainty.
A more extreme outcome could be what happened in Libya. Prior to and during the first parts of the conflict, Eni's production of 280,000 barrels of oil equivalent essentially came to a standstill for six months. Even today, almost two years after the company restarted production, the company's production is only 36% of what it was before the conflict.
Another element to consider as well is a sustained period where the Suez Canal is shut down. If this were the case, it could be a temporary boost for tanker fleets. LNG carriers like Teekay LNG Partners (NYSE:TGP), the third-largest liquefied natural gas fleet, would be well positioned to benefit from the increased ship times. Day rates for LNG carriers are about $100,000 per day, and the extra eight to 15 days of shipping time could be a nice pad to revenue.
Oil tankers could also see a benefit as well. With potential of the SUMED pipeline being shut down, it would mean that tankers would need to increase traffic by 2 million barrels per day and increase its shipment times as much as LNG tankers. Norway's Frontline (NYSE:FRO), the world's largest oil tanker fleet, has day rates of about $25,000 for its oil carriers, so it's not as much of a win as LNG carriers. Also, higher fuel prices for all shipments will eat into that revenue boost.
What a Fool believes
For producers and shippers alike, it all comes down to the severity and duration of unrest in Egypt. More than likely, these will be temporary situations that could affect revenue for a while. It is hard to see either situation completely changing an investment thesis for any of these companies unless some completely drastic measure happens in Egypt in the next couple months.
More than anything, events like this play on investor's emotional reactions. Fear of higher oil prices leads us to overvalue the threat. Just look back at the Libya example from two years ago. The biggest run-up in oil prices came before any civil unrest. As the civil war was prolonged and oil production in the country dropped by over 1 million barrels per day, global oil prices steadily fell for the rest of the year.
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