Egypt Not The End Of The Story

2/21/2011


The Feb. 10 resignation of Egyptian President Hosni Mubarak after 30 years in power sparked only a small decline in U.S. energy prices. West Texas Intermediate (WTI) crude oil sold for $84.32 per barrel Feb. 15, down 2.8% from the day before the resignation and 8.2% below January's 27-month high.

About 4.5% of the world's oil supplies and 14% of liquefied natural gas pass through the Egypt-controlled Suez Canal and Sumed pipeline. Mubarak's resignation reduces the risk of a near-term disruption in that flow. But Mubarak's actions have not exactly defused regional tensions. Nobody knows who will fill the power vacuum in Egypt, and activists emboldened by recent events have begun making noise in other Middle East countries, including oil producers Iran and Bahrain.

At the moment, the U.S. seems better prepared for continued unrest in the Middle East than it was a few years ago. U.S. oil demand remains about 5% below prerecession levels, and increases in both domestic production and Canadian imports provide some insulation against supply disruptions. While the global oil supply is tightening, U.S. supplies are well above the average for this time of year — and on the rise. Such trends tend to exert downward pressure on prices, and WTI crude's per-barrel price has declined 7.7% so far this year, on the surface providing a negative indicator for shares of oil companies. However, oil isn't the only important energy commodity, and the WTI isn't the only oil benchmark.

Despite relatively high inventories, U.S. gasoline prices have been trending higher for four months, with the national average recently hitting the highest level ever for the middle of February. The improvement in demand for refined products bodes well for both pure-play refiners and integrated oil companies like Exxon Mobil ($83; XOM) and Hess ($81; HES), which tend to benefit from higher gasoline prices. However, if gasoline prices surge in the summer as they normally do, the consumer could feel a pinch.

Over the last 10 years, the price of North Sea Brent crude — a benchmark more relevant for European and Asian users — has averaged a 2.9% discount to WTI. However, Brent's per-barrel price reached $101.6 on Feb. 15, 20.5% above the WTI price and up 9.0% for so far this year. Most of the large U.S. oil companies produce and sell all over the globe. The combination of rising demand and continued political turmoil in the Middle East could keep oil prices on an upward trend — generally good news for energy shares.


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