Scenarios: Oil and unrest: what's the worst that could happen?

LONDON Thu Feb 3, 2011 8:52am EST

LONDON (Reuters) - Oil industry experts believe major Gulf oil nations have enough cash and military support to avoid Egypt-style civil uprisings, which emerged as the key fear factor for volatile oil markets.

A third of the world's oil comes from the Middle East and North Africa and the uprisings in Tunisia, Egypt and Jordan pushed Brent crude oil above $100 a barrel.

Oil focused-bankers and funds managers told Reuters that even if unrest in Egypt cuts flows along a strategic pipeline and the Suez Canal, the oil price spike would be short-lived and flows would resume quickly -- whoever is in power.

Here are some scenarios in the Arab world and how they could affect the oil market:

GULF EXPLODES

Major political upheaval in the Arab Gulf is seen as the most unlikely but the most feared scenario. Saudi Arabia's oil output alone accounts for over a tenth of global production.

"The risks associated with Egyptian supply closures have been priced into the current cost of a barrel. But if civil unrest spreads to other major oil producers in the region then all bets are off," said Andrew Moorfield, the head of the oil division at Lloyds banking group.

The high oil price will likely reinforce the status quo for countries like Saudi Arabia, which needs a price of at least $70-$80 a barrel to balance their budgets.

"The whole region is a potential tinderbox," said Peter Csoregh, who helps manage Natural Resources Equities at Robeco Asset Management with a total of 147 billion euros ($203.5 billion) under managements.

"But the big oil producing nations have a lot of money, they have very well entrenched military and security forces, and the money is spread around to a reasonably large part of the population," he said.

The higher the oil price, the more stable the Gulf monarchies are, agreed Samuel Ciszuk at IHS Global Insight.

"They can afford to uphold their traditional bargain of delivering cradle-to-grave welfare systems to their citizens in exchange for their political quiescence," he said.

NEW UPRISINGS IN NORTH AFRICA

Oil will rally -- although less steeply -- if unrest spreads to other North African countries including OPEC members Algeria or Libya, which are seen more vulnerable than the Gulf but still reasonably well insulated by oil wealth and a strong military.

Algeria and Libya produce together over 3 million bpd of crude or around 4 percent of the global output. Algerian gas exports meets over a tenth of Europe's consumption meaning any stoppage would draw large quantities of liquefied gas to Europe.

"Algeria is run by a military which is very used to putting down domestic unrest, and public protests have so far been limited to the economy. In Libya, if they have to shoot civilians they will. So it will be very difficult to get a reform movement going there," said Csoregh.

SUEZ CANAL

Egypt is a small oil and gas exporter and the main danger of the unrest is seen as a closure of the Suez Canal or the large Suez-Mediterranean (SUMED) oil pipeline which passes near Cairo.

The canal has experienced problems as cargo operations at two Egyptian ports have nearly halted.

The canal ships 1.5 million barrels per day (bpd) of crude and the pipeline is shipping 1 million. Together they account for nearly 3 percent of daily global oil demand.

The canal is named by the U.S. government as one of the most important points for world trade. It is also a big route for liquefied natural gas, with about 13 percent of global LNG output passing through in 2010.

"This risk is relatively priced in and if it occurred would have a limited impact to prices to the upside," said Tony Hall, chief investment officer at hedge fund Duet Commodities.

Manouchehr Takin, analyst at the Center for Global Energy Studies said he believed disruptions would not last long: "If there is a new regime they will want to keep operations and to get things back to normal and the overall price will settle."

"The canal generates $4 billion a year for Egypt and it is well protected by the military, which is probably the strongest military in the Middle East, bar Israel," agreed Csoregh.

Oil can still be shipped from the Middle East to Europe by sailing around Africa, adding around 15-20 days of travel time and increasing freight costs. A closure would have more impact on refined oil products which travel on smaller tankers through the Canal without any loading restrictions, unlike crude.

Analysts at the Center For Strategic and International Studies said they estimate products shipments through the canal at above crude volumes of more than 1.5 million barrels per day.

A closure would wreck east-west arbitrage flows by trapping jet fuel and gasoil in Asia and naphtha and fuel oil in Europe.

Jet fuel premiums in Europe are now at 28-month highs near $90 a ton.

OPEC INCREASES PRODUCTION TO CALM MARKETS

While most analysts agree OPEC will likely withstand calls from the West for an immediate large output boost, the cartel may chose to quietly leak more barrels to the market.

Chief economist of oil major BP told Reuters OPEC was likely to raise output in response to tensions in the Middle East.

"The longer the uncertainty around the Middle East and political tensions continues... that may actually prompt them to do more rather than less in order to calm markets down," Christof Ruehl said.

OPEC says it has spare capacity of 6 million barrels to meet lost output but would do it only when it sees a shortage in the market rather than speculator-driven rallies. Some experts believe OPEC's spare capacity is around 4 million.

Moorfield noted OPEC's repeated statement that it saw no reason to meet before June: "If and when crude moves closer to $120, the price at which alternative energy starts to become viable, we may see OPEC start to loosen their grip on supply."

(Reporting by Emma Farge, Dmitry Zhdannikov, Claire Milhench, Daniel Fineren, Barbara Lewis and Jonathan Saul in LONDON, writing by Emma Farge and Dmitry Zhdannikov, editing by William Hardy)

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