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The ongoing crisis in Egypt has raised fresh concerns about the availability and security of Suez Canal. The global shipping industry is watching with bated breath developments in the region and for any early signs of more trouble.
Given that Suez Canal is a strategic conduit for movement of oil from the Gulf into Europe and from Europe into Asia, any disruption in the region has serious implications for the crude market. At a time when oil prices are gaining from strength to strength because they are more fundamentally driven, closure of the canal can have adverse effects. It may be recalled the canal was closed for several months during 1956 and for several days in 1967. However, at this point of time there is nothing to suggest that the Egyptian government would decide to close the canal.
In the unlikely event that the Egyptian government opts to close the canal and the pipeline, the loss to oil trade flows would amount to about 2-3 million barrels a day of crude and around 2 mb/d of products, Barclays Capital said in a special report.
The canal accounts for about 7.5 per cent of world sea trade, with receipts from the canal amounting to just under $5 billion in 2010. The bulk of the northbound crude flows feed the Mediterranean refineries, where the effect will be the most acute, with the oil tankers then required to deliver crude cargoes directly to European refineries, the report pointed out, adding that a potential escalation of violence in the Suez area could not only impact oil transit but also some large refineries in the area, with Egypt's largest El-Nasr refinery (1,50,000 b/d) located in the vicinity.
On the other hand, trade flows through the Suez Canal and Sumed pipeline account for just 4.5 per cent of total global oil supplies. While any short-term disruption on the canal or pipeline would have no impact on underlying oil output, the impact is likely to reverberate through changes in the pattern of world trade on regional crude prices and differentials, with the currently oversupplied tanker market potentially finding some temporary strength, the report stated.
Impact on Asia
What will be the impact on the fast growing Asian economies? In a market where the epicentre of demand growth has moved to Asia, and West African and Middle Eastern crude production is increasingly meeting that demand, the impact of the closure of the canal this time around would likely be far more limited than in the 1950s and 1960s, it is argued.
On the other hand, the impact on prices cannot be wished away. In a world where spare capacity is being taken less for granted than it was, particularly in early 2010, price breakouts due to geopolitical reasons are more likely.
At a time when the world is witnessing unprecedented demand strength, reduced inventory overhang and less spare capacity, it would be rather risky not to maintain a clear focus on geopolitical developments.
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