Societe Generale On Why A Suez Canal Crisis Is Unlikely Right Now

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The Suez Canal is priority number one for many investors watching the crisis in Egypt develop. As one of the global oil choke points, its security is perceived as vital to world oil prices.But thus far, it has remained open for business and, according to Societe Generale, that is likely to continue. That’s because in order to close the canal, it would take either paramilitary attacks on its facilities by well armed Egyptian groups or a work stoppage. The former don’t exist, but the latter remains a possibility.

From Societe Generale (emphasis ours):

The point is that without an organised political movement, we do not see the supply threat coming in the form of organised paramilitary attacks on the Suez Canal or the Sumed pipeline. organised or semi-organised militias need financing, weapons, and training, and this does not seem to be part of the landscape in Egypt – particularly with the Egyptian military both strong and firmly behind Mubarak. Rather, the supply disruptions are more likely to come in the form of labour strikes, which could shut down operations at the Suez Canal or the Sumed line.

The threat to Suez is therefore more limited than some may be speculating, though a work stoppage could occur. And even if it did, according to SocGen, there’s plenty of spare capacity that could ramp up around the world to meet demand.

From Societe Generale:

First, OPEC currently has 4.9 Mb/d of spare crude production capacity, of which Saudi Arabia has 3.5 Mb/d. Second, industry stocks in IEA countries are comfortably high at 2.74 billion barrels of crude and products. Third, strategic crude and product stocks in IEA countries total 1.56 billion barrels, enough to maintain a 2 Mb/d drawdown rate for 2 years.

There’s going to be short term instability in the crude oil market, but don’t expect the Suez crisis to have a dramatic impact on the market.

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