middle east instability driving oil price

Here's a brief summation from oil price intelligence on the Middle East. In a nutshell the region is more unstable than it has ever been and seems to be worsening.If the Suez Canal is threatened surely that will bring the US back into the equation...and then what?

Oil prices in the US have risen to $107.33 per barrel over the chaos on Egypt, with over 680 people killed in the military’s campaign to disperse Muslim Brotherhood protesters—an ill-fated move that ruins the interim government’s credibility and ensures a continuation of violence and instability that could spread to the Suez Canal and affect the entire region.

This is what oil prices are responding to right now, but other trends could also keep oil prices on the upward swing for the near-term, not the least of them chaos in Libya, which is threatening exports and production, and Iraq’s attachment to the conflict in Syria.

Yesterday, while US oil rose 48 cents to $107.33 per barrel, September Brent rose 90 cents to $111 to reach its highest price in over four months.

For Egypt, it’s not about crude production, but about crude transit through the Suez Canal and the Sumed pipeline.

Then we have Libya, which enjoyed a post-Gaddafi revival of production to almost 100% capacity, up from 3% capacity in the summer of 2011. Last summer, it was producing 1.6 million barrels a day. But this has already been shattered. The authorities have less control over the country than do various bands of roving militias and tribal chieftains and the chaos is spreading daily. The country is on the verge of collapsing, oil workers are striking and security is a free-for-all. Militias can shut down an export terminal anytime they like. And they are doing it now. As of the beginning of this month, Libya has only one operating terminal—the others having been hijacked by militias. Production is also taking a hit this summer, and looks set to spiral downwards. As of this week, Libya is producing only 650,000 barrels per day.

Then we have Iraq, where production is slumping and targets are not being met as the country faces civil war and total collapse. We are always hesitant to write Iraq off, though. The resilience of oil to violent chaos is amazing, and somehow the oil keeps pumping when everything else has stopped working—up to a point. But Libya should be a harbinger of what could happen in Iraq if the current pace of disintegration continues. While Baghdad and Big Oil remain highly optimistic that not only will targets be met, but exceeded, by year’s end when production starts at the supergiant Majnoon oilfield, operated by Royal Dutch Shell. The optimism is probably realistic, for this year, but further down the road, the conflict in Syria threatens to turn the Iraqi oil giant into another Libya.