Egypt’s political turmoil not a trigger for an oil price spike

by: Arjen van Dijkhuizen , Hans van Cleef

The political and economic situation in Egypt remains tense. Last week, the army facilitated the 2nd presidential exit in around two years. Since then we have seen regular clashes, particularly between the army and Muslim Brotherhood supporters. Earlier this week, interim President Mansour issued a Constitutional Declaration, presenting a timetable for constitutional reform in four months and new elections in six months. Mansour also appointed the respected economist Hazem al-Biblawi as PM. However, many obstacles remain as most political factions have rejected Mansour’s decree. Meanwhile, on Wednesday, Saudi Arabia and the UAE offered USD 8bn in aid. These funds will give Egypt more breathing space. We still think an IMF program with conditionality is preferable, as that would address underlying problems and unlock billions of other bilateral and multilateral funds. The current impact of the Egyptian turmoil on the oil price’s risk premium is limited in our opinion. Moreover, in a worst-case-scenario (full blockade of Suez Canal), we expect the additional impact on oil prices to also be limited. This would reflect additional transport costs, as oil vessels have to take a diversion around the African continent, but would not take Gulf oil out of the market. Looking forward, we think that plentiful supply in the oil market will dampen prices.