Oil Prices Will Fall On Egypt Non-Event And Change In Indian Policy

Includes: OIL
by: Robert Loftus

Lately we've seen an increase in oil prices due to concern by traders over political turmoil in Egypt. These concerns are largely misplaced, and appear to be the result of investors who are lacking in oil market information, and prone to hysteria over difficulties in the Middle East. In an earlier article I discussed the Convergence and Decline of WTI and Brent Oil Futures, and that long-term trend is still under way. The current rise in oil futures prices is a media-manufactured blip that is not supported by market fundamentals. Concerns over disruption of oil markets due to Egyptian unrest are unfounded as Egypt is a net importer of oil. Also, the Muslim Brotherhood has not demonstrated any interest in attempting to Pirate oil vessels, or trying to limit access to the Suez Canal. Worldwide oil demand should decline as a result of multiple factors, including the Indian government's decision to reduce gasoline price subsidies for Indian consumers. This combination of factors means the recent spike in oil prices is nothing more than a media manufactured pump and dump, and not a long-term price trend.

Egypt is a net importer of oil (click on the Petroleum tab to expand the chart). Also, there have been no reports of any attempts to disrupt oil production in the country. Even if there were, Egypt is a relatively small economy, and any decline in Egyptian production that would have to be made up by increased imports to the country would be relatively small. According to the EIA chart cited above, Egyptian oil production is roughly 725.68 thousand barrels per day. For the sake of comparison, the June 28, issue of the EIA Weekly Petroleum Status Report [pdf] indicated that U.S. imports of petroleum have declined by 1.1 Million barrels per day over the course of the last year - a result of increased U.S. oil production. Total Egyptian oil production is smaller than the increase in U.S. Production from the past year.

The Muslim Brotherhood has voiced no interest in attempting to block passage of the Suez canal. Even if the Brotherhood were interested in attempting such an action, any ramshackle attempt at canal piracy would be met with overwhelming military force. The Suez canal has a deep enough draft to support U.S. Navy warships. Last year, Iranian saber rattling resulted in a bit of gun-boat diplomacy when the USS John Stennis carrier group passed through the Suez Canal. Any Muslim Brotherhood small craft that attempted to create issues in the canal would be quickly dispatched.

Along with the multiple factors pointing to declining U.S. demand that I discussed in my earlier article, international oil demand should also face downward pressure from shrinking factory activity in China, and the decision by the governments of India and Indonesia to cut fuel subsidies. The decision by these countries to reduce gasoline subsidies should not be written off. India is the world's fourth-largest consumer of energy. Widespread declines in Indian consumption of gasoline could put significant downward pressure on worldwide petroleum demand.

Recent concern that's led to a spike in petroleum prices is not based in reality. Egypt is a net importer of oil, and even if the country had to replace all of its domestic production through imports, that level of imports would be less than the increase in U.S. production seen over the course of the last year. The Muslim Brotherhood is not a credible threat to the Suez Canal, and any misguided attempts at canal piracy would be met with overwhelming military force. Multiple economic factors including structural changes in the U.S. economy, a slowdown in Chinese manufacturing, and changes in government policy in India and Indonesia should put downward pressure on worldwide petroleum demand. No credible arguments have been presented to justify the recent run-up in futures prices, and the recent increase seems to be a product of hysteria and misinformation. A return to the convergence and decline pattern for Brent and WTI oil futures is inevitable.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.