Why Middle East and North Africa turmoil could cause an oil price spike

2013.07.02 - OPECEnlarge Graph

Middle East and North Africa (MENA region) are major oil producing areas

 

Much of the world’s oil production comes from the Middle East and North Africa (the MENA region). For example, of the 12 OPEC (Organization of Petroleum Exporting Countries) member nations, eight are located in the Middle East or North Africa. Additionally, the largest oil exporter in the world is Saudi Arabia, located on the Arabian Peninsula in the Middle East.

 

Geopolitical turmoil threatens oil supplies

 

Because of the concentration of the world’s oil produced from the MENA region, geopolitical unrest in the area could threaten oil supplies. For example, when Libya experienced political turmoil in 2011, production dropped from roughly 1.65 million barrels per day (bbl/d) to near zero during the height of the conflict. Because of the supply disruption, member countries of the International Energy Agency (IEA) released 60 million barrels of oil from emergency stocks to stabilize oil supplies and prices.

 

Egypt in crisis

 

Currently, political tensions in Egypt between President Mohammed Morsi and Egypt’s military are reaching a fever pitch. Morsi assumed the role of president last year, but has since lost popular support, as many Egyptian citizens have become disillusioned with his leadership. This unrest has escalated into a conflict between the President and his supporters and the military, and recently a military coup.

 

Contagion possible throughout the region

 

While Egypt itself is not a major oil exporter, political unrest in Egypt could spread to nearby oil-exporting nations. For example, during the Arab Spring of 2011, unrest started in Tunisia and quickly spread across the MENA region, in some cases disrupting oil supplies. When geopolitical tensions increase in the MENA region, markets often respond with higher oil prices, as the possibility of an oil supply disruption is higher.

 

Given these points, investors should monitor the situation in Egypt, as increased unrest can result in higher oil prices, which affects the earnings and valuation of oil producing companies such as Exxon Mobil (XOM), Chevron (CVX), ConocoPhillips (COP), and Anadarko (APC), as well as energy-focused ETFs (exchange-traded funds) such as the Energy Select SPDR (XLE).