Even though Egypt and Syria have a very modest oil output, a leading Forex Blog says uncertainties in the region often cause shock waves in the world oil market. Every time there are heightened tensions in the region, traders panic and this usually results in hefty rises in the price of oil.
Limassol, Cyprus -- (SBWIRE) -- 09/06/2013 -- Experts at forex trading believe that although everyone is concerned with tensions in Syria now, Egypt may lead to higher oil prices too. Two years after Hosni Mubarak’s administration was brought down during the Arab Spring, the country has plunged into political turmoil once more as Mohamed Morsi, inaugurated as Egypt’s first freely elected president a year ago, was banished from office by the military. Since then, the price of crude oil has been on the rise. In mid-July, oil prices jumped above $106 a barrel, their highest level in more than 12 months.
Whereas Egypt’s oil production per se does not contribute to a significant amount of the world’s oil and gas, it does control about 5% of its delivery through the Suez Canal, which is one of the world’s busiest shipping lanes. It is estimated that about 1.8 million barrels of oil per day (mbd) are transported through this important waterway. In addition, another 1.1 mbd or so barrels are transported through the 200-mile long Sumed pipeline connecting the Red Sea to the Mediterranean. As such, if there is any threat of disruption here, traders start panicking and this would increase the volatility of the market.
High volatility necessitates a rebalancing of contracts and a clear rise of oil prices in the market. A good rule of thumb to apply here is that, for every 1% reduction in world oil production (exclusive of an equivalent reduction in demand), the average crude oil prices rise by up to $10 per barrel.
When there is a crisis or any kind of instability in Egypt, hitches in the Suez Canal supply route can be caused by government cuts in communications all over the country. This has the potential to impede the flow of oil.
Moreover, when there is unrest in Egypt, a populous country regarded as the opinion leader in the Arab region, broader disturbances across the Middle East and North Africa are often feared. It is estimated that nearly a third of the word’s oil production originates from this region.
Therefore, despite not being a major producer, Egypt’s situation has a big influence on oil prices in the international market. It is hoped that the situation in the country is brought under control soon and that this will help to contain the price of oil. If not, the wellbeing of the world’s economy as well as the stability of the financial markets could be further jeopardized.
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