(This post was written last week, forgive the publishing delay –The Analyst)
I have been asked for the past week about possible risks to the Suez Canal as it’s a major a potential choke point for oil flows. According to the Energy Intelligence Agency as of November 2010 nearly 2 million barrels a day of petroleum traveled thought the canal . In the worst and highly unlikely case – a closure of the canal – shippers of oil would be forced to send tankers around Africa causing tanker charter rates to increase and add around ten dollars to the price of NYMEX Light Sweet Crude. ICE Brent oil would likely be affected more to the upside due to a lack of land storage and other market dynamics that effect the basis between NYMEX Light Sweet that I will write about another time.
I, for one believe Mubarak himself represented the greatest threat to the security of the canal. According to major media sources, Egyptian military generals of to threatened to tear off their uniforms and join protesters in the street against Mubarak unless he gave his resignation today. Many retail traders get caught in the hype and do not know about the Suez canal & it’s control by the Egyptian military. The Egyptian Army has always maintained a large security presence around the canal because of its importance to the economic well-being as well as the international relevance of Egypt.
Had Mubarak not resigned, the senior military officials would have joined protesters in the street and the officers and grunts who had even less love for Mubarak then their superiors would have almost certainly abandoned their posts. Had you had the military abandon their posts guarding the canal that would have been the most dangerous risk for the canal. Terrorists would have looked at an unguarded canal as the opportunity of a lifetime, now that Mubarak has left office and the military is in control this is out of the cards.
Looking to the future, in my humble opinion, no matter whoever ends up in control of Egypt when power is hopefully tuned to civilian rule would have to keep the canal open as closing it would be more of pain in the ass for oil shippers then a real crisis.
The greatest question that should be on the minds of energy traders now is the implication this revolution in Egypt will have in/for the other oil-producing nations in the region. The argument could be made that with the events in Egypt playing out as they have OPEC and non-OPEC producers would likely increase production to buy political good-will from their citizens through handouts. An increase in production would obviously would provide some relief in oil prices in the coming months.
Large energy traders are already arbitraging from March to April due to a market condition known as contango. Contango is simple to understand: if the nearest delivery month future contract price is below the later delivery months the market is in contango. Because April is $3.72 then in March they will buy taking physical delivery for March and sell April futures against it. When delivery is taken the energy trader buys the oil then pays for it to be stored at a cost of $1.35 a month per barrel then as they hold a short position to hedge against price declines. The trader collects the difference between the $3.72 and $1.35 and making $ 2.37 before the financing costs to pay for the oil and fees for delivery.
The major problem is retail traders who have futures accounts can’t do this trade because of the financing requirements and expertise in the physical oil market required, but I thought I would share so you could get a understanding of what the energy traders do.
Paper Barrel has followed the energy markets since for over eight years. He has a bachelors degree in Political Science (focusing on International Security) with a minor in Economics. While obtaining his Bachelors degree he networked in the energy industry in New York. After reviving his degree he took a job as a commodities broker and passed the National Commodity Futures Exam Series 3 .Working as a commodity broker for a year he helped introduce small oil distributors to energy futures and Clearport products to meet hedging needs. Currently works to also broker physical JP54 Jet fuel and consult on hedging strategies.
He mainly focus on hedging energy.. If you are interested in more on energy market & derivatives issues you can follow him on twitter @paperbarrel if you have questions or feedback please email him: paperbarrel at gmail dot com.