Middle East Uprising Impact On Energy Market Extends Beyond Oil Prices

The pressure of the crisis on destination markets in Europe — or end users such as the airline industry — could exceed the impact on the global market as whole.


An investor checks the stock markets while talking on his mobile phone on the floor at the Dubai Financial Market, at the Dubai World Trade Centre, in Dubai, United Arab Emirates, on Thursday, May 21, 2009. The United Arab Emirates may consider rejoining a planned monetary union of oil-rich Gulf Arab states though the federation is “not interested for the time being,” the state-run WAM news agency quoted Foreign Minister Abdullah Bin Zayed Al-Nahyan as saying. Photographer: Andrew Parsons/Bloomberg News


It’s hardly surprising that the price of oil would be particularly sensitive to the upheaval in the Middle East. For the most part, investors have taken in stride the protests and deadly crackdowns spreading across the region — from Tunisia and Egypt to Libya, Yemen, Algeria, Iran and Bahrain.

The significance of the Middle East uprisings to the energy market — a major factor in the global economy — extend beyond the oil price, though. Bahrain, Libya, Yemen, Algeria and Iran together account for 10 percent of global crude oil production, as well as for 10 percent of global refining capacity, according to Deutsche Bank analyst Soozhana Choi.

Much of that output is headed to Europe. While the region may account for a relatively modest percentage of global output, it is still significant. And one can imagine that the pressure of the crisis on destination markets in Europe — or end users such as the airline industry — could exceed the impact on the global market as whole.

The odds of democratic revolution spreading to major oil-producing states such as Saudi Arabia appear to be low, at least for the moment. But should that occur, the impact on the global market would be huge, for the Middle East and Northern Europe account for 35 percent of global crude production, according to Choi.

“At this juncture, the markets are telling us there is higher risk, but it’s not significantly higher. They are watching currencies, gold, and the price of oil. They are paying attention to geopolitical risk. After that, you pay your money and you take your changes,” Hugh Johnson, chief investment officer of Hugh Johnson Advisers in Albany, New York, said Friday.

The Middle East uprisings are of particular concern to investors in the oil market. The price of a barrel of Brent has pushed to $102.59 as of Friday and is likely to remain in the $100 range, according to analysts. (See: Will the Mideast Revolt Push Oil Prices Higher?) “Concerns about risk and geopolitical supply disruptions have returned aggressively to the global oil market psyche,” Choi wrote Friday in a note to investors.

The price of Brent is up from 52-week low of $69.55. And while the bulk of that gain is doubtless tied to demand in a recovering global market, Choi says there is a geopolitical premium, too. Brent is up about 9 percent for the year to date, roughly coinciding with the outbreak of protests that started in Tunisia.

The rise in the price of Brent contrasts with the decline in the value of West Texas Intermediate crude. WTI, which traditionally commands a premium to Brent, is now selling at $86.36 a barrel. That isn’t likely to change, soon. WTI is sold regionally in the U.S. So other parts of the U.S. may have to pay more, just like customers in Europe.

For now, the revolution in the Middle East and Northern Africa complicates matters in the oil market.

“If the uprising spreads to Saudi Arabia, we are talking about a potentially serious interruption of oil production,” Johnson says.