Comrades in Oil

Heightened tensions in Egypt sparked crude supply concerns on 11 February, rising Brent crude oil prices to $101.34, while US crude rose to $87.15 a barrel with the spread between March-delivery futures for WTI and Brent remaining wide.

“The only hotspot right now is Egypt,” Fadel Gheit, a New York-based senior energy analyst with Oppenheimer & Co, told New Europe by phone on 10 February. He explained that Egypt is not a big oil producer and exporter but the market worries about a potential disruption in oil shipments through the Suez Canal. “A long-term disruption of the flow of oil in the Canal could definitely push the price higher. But I think it is very low probability, I think it is very highly unlikely that we are going to see this disruption. It is in no one’s interest to see the oil in the Canal disrupted by any means,” Gheit said.

Nevertheless, no major increase in supply is expected from the Organization of the Petroleum Exporting Countries. OPEC is absolutely convinced that it is not their fault that oil prices rise, noting that there is plenty of oil in the market. “We are running out of room to store WTI light sweet crude in the United States,” Gheit said. “There is so much of light sweet crude we don’t know what to do with it. That’s why the discrepancy between Brent and WTI is at an all time high. So it has never happened before that the Brent is trading at such high premium to WTI and the reason is of WTI supply that has overtaken the US market,” he added.

Brent, on the other hand, is at such a high premium, it's a tempting play for traders. “Brent production is in decline. So it is beginning to look like a relic but because of the absence of any other marker crude Brent is still the marker crude. So Brent is definitely affected by excessive speculation about potential supply disruption from the Canal which I totally dismiss,” Gheit said.

The high Brent crude oil price, which is the base for Europe, is affecting European countries, prompting EU Energy Commissioner Gunther Oettinger to warn on 10 February in London that it could hurt the European economy if it persists for a long period. He told reporters that companies should adjust their planning accordingly, and try to become more energy efficient or turn to other sources of fuel. "The oil price will not go back to $60 (a barrel)," as it did in 2008, Oettinger said. "As a normal perspective, you have to accept the oil price will be near to $90 a barrel or some more."

OPEC and the International Energy Agency (IEA) said on 10 February in two separate reports that global demand for oil will grow more this year than previously forecast. They cited stronger demand from the US and Asia as one reason for their revisions. The Vienna-based OPEC predicted demand would reach 87.74 million barrels per day, an increase of 1.4 million barrels per day from last year. The IEA said global demand would rise to 89.3 million barrels per day, up 1.5 million barrels from 2010.

Meanwhile, the high oil prices and unrest in Egypt may prompt oil majors to expand their presence in Russia as recent deals with Shell, ExxonMobil and BP suggest, Konstantin Simonov, director of the independent National Energy Security Fund in Moscow, told New Europe on 10 February. “After the situation in Egypt, maybe soon we will have the same story in Libya, the same story in Algeria and there are a lot of rumors about the health of the King in Saudi Arabia. The political situation in the oil-producing countries is changing,” Simonov said. “Maybe now western majors understood that the situation for investment in Africa, South America and Central Asia is not so excellent and maybe Russia is not the worse place in the world. At the same time we see that (Russian Prime Minister Vladimir) Putin understood that it is impossible to increase the production in Russia now without foreign companies,” Simonov added. “The simplest idea is to welcome foreign majors and to be more flexible with them,” he added.

Gheit told New Europe that the deals require a lot of capital and a lot of technology. “Russia is taking advantage of what is happening on the Gulf of Mexico – there is no access to large recourses. And the Russian oil companies can’t do it alone so they have to invite foreign companies. So Russia is not going to open their doors to foreign companies unless their own companies cannot do it on their own,” Gheit said.

By Kostis Geropoulos

New Europe, February 13, 2011