Fires flare off the gas from crude oil at Iraq's oldest oil processing plant in the northern Iraqi town of Baba Gurgur, outside of Kirkuk.KHALID MOHAMMED/The Associated Press
Oil traders are still putting a price on political risk in Egypt.
The stunning resignation of Egyptian leader Hosni Mubarak on Friday took some steam out of crude markets on Friday, amid relief that a violent standoff was averted. Still, concerns remain about the future of the country and the possibility of popular uprisings spreading through the oil-rich regions of the Middle East.
"It's a cathartic moment but it's not at all clear what is going to emerge," said Greg Priddy, Middle East analyst for Washington-based Eurasia Group, a political risk adviser.
North Sea Brent, the leading international benchmark crude, had gained 5 per cent in volatile trading since the outbreak of protests in Cairo, surging above $103 (U.S.) a barrel this week. Following Mr. Mubarak's apparent decision to cling to power on Thursday night, Brent shot up 1.2 per cent to $102.03 per barrel in early trading Friday. But it gave up most of those gains after Mr. Mubarak capitulated on Friday, closing at $101.44 a barrel.
The benchmark North American crude, West Texas Intermediate (WTI), fell $1.15 to $85.58 a barrel on the New York Mercantile Exchange after news of Mr. Mubarak's resignation. Except for a brief boost from the Egyptian unrest, WTI has been under pressure for weeks because of growing inventories at the Cushing, Okla., refinery hub where it is priced.
Egypt is not a major oil producer but is a key transportation conduit for crude deliveries from the Middle East to Europe and North America, with some three million barrels per day of crude and petroleum products shipped through the Suez Canal and the Sumed (Suez-Mediterranean) pipeline.
Even the complete closing of those links should have only a modest impact on crude prices, as companies would simply ship it around the Horn of Africa, a 12-day, 9,650-kilometre voyage.
Analysts say oil prices fell on the perceived reduction in threat to the Suez Canal. But that political risk will continue to influence the market, particularly if it spreads to the undemocratic regimes of the oil-rich Arabian peninsula. Most consider that as unlikely, given the higher incomes enjoyed by citizens of Saudi Arabia, Kuwait and the United Arab Emirates.
"The odds of political upheaval on the Arabian peninsula are very low," said Michael Lynch, president of Strategic Energy and Economic Research Inc., of Cambridge, Mass. "The odds that traders will fear political upheaval on the Arabian peninsula are extremely high."
Mr. Priddy said oil traders are more concerned about future political instability in the region, whether as a result of ongoing tensions in Egypt or the eruption of violent demonstrations in places like Yemen and Bahrain.
He said Bahrain's Sunni Muslim rulers face unrest from the Shiite majority. The kingdom sits on the doorstep of Saudi Arabia's oil-rich eastern province, where a Sunni-led government also rules over a restive Shiite populace.
Mr. Priddy described such developments as "low probability, high-impact events." But just a few weeks ago the overthrow of Hosni Mubarak was seen as a low probability, too.