The Brent price has been on a broadly downward track over the last year (Figure 1) and has averaged USD 107.90/bbl YTD, down 3.4% on the FY12 outturn of USD 111.71/bbl. However, events in Egypt have jolted the oil price upward starting with the ousting of President Morsi on 3 July, gaining traction with the sustained disruption to Libyan production since then and ramped up by the violent clearance of the Islamist protest camps in Cairo on Wednesday.
Egypt itself is not an insignificant oil producer, with crude production of 556kb/d and total liquids production of 728kb/d in 2012, equivalent to some 8% of total global liquids production. However, it consumes as much as it produces so matters little for global balances, assuming significant disruption to production from here, should that occur, would likely be broadly matched by an enforced drop in consumption.
While any significant ramp-up in tension in the MENA region tends to push the oil price up, the effect is generally short-lived, provided it becomes apparent that wherever the source is, it is not going to have a significant overall impact on oil supply. With the exception of the Libyan civil war, that has generally been the case for outbreaks of tension in North Africa and the Levant.
From that perspective, we would not normally expect the troubles in Egypt, severe as they are, to be particularly meaningful for the oil price, except in the short term. However, in our view, the inability of Egypt to form a durable polity in the wake of the regime change wrought by the Arab spring, is symptomatic of the difficulty every other MENA country that has experienced similar regime change has had in achieving stable government. In that context, events in Egypt are potentially highly significant for other countries which are much more important oil producers. Within the North African context, Libya is the most obvious example and across the region, production currently languishes some 700kb/d or 30% below the levels preceding the Arab spring (Figure 2).
It is clearly uncertain how oil production from North African production will fare from here, but if Libya is unable to recover its oil production over the next few weeks, the omens will not look good.
The drop in production also comes at a time when global supply/demand balances might well be tighter than the raw data suggest (See IEA Data of 13 August) so any further loss of production or perceived potential loss of production is likely to be taken as bullish for the oil price by the market. Events have moved rapidly, and we expect that Saudi Arabia will be likely to increase production further, in an effort to reign in the current increase in price above the USD 110/bbl level, but it might take time to react. Right now it would have to add 600kb/d to current production taking it to 10.4mmbbl to get OPEC production back to the May level of 31.0mmb/d, assuming no further changes in OPEC production. That would be an all-time record. With Iraqi production potentially set to fall 0.5mmb/d in September on infrastructure upgrades, markets might start to worry about Saudi production capacity limitations if they are not convinced that Iraqi volumes will return promptly.
Given the uncertainties, we retain our USD 106/bbl FY13 price forecast for Brent, but the risks of a higher outturn have risen sharply given recent events. Were the Brent price to average USD 111/bbl for the rest of the year the FY13 outturn would be USD 109/bbl.