Egypt, Higher Oil Add to Stock Market Woes

News Analysis
By Frank Yu
Frank Yu
Frank Yu
August 19, 2013 Updated: August 18, 2013

Tensions in Egypt have exacerbated the stock market’s recent decline. The Dow Jones Industrial Average closed out Aug. 16 down 30.72 points, or 0.2 percent. Last week’s decline was its worst weekly performance of the year.

The U.S. stock market has hit a bit of a rough patch, with the S&P 500 Index closing lower in eight of the last ten sessions. Weak retail performance, declining consumer confidence, and specters of higher interest rates—coupled with light August trading volume which is even more susceptible to macroeconomic shifts—have all contributed to the market’s recent decline.

Adding fuel to the fire, last week’s violence in Egypt threw a curveball into the global financial markets. Clashes between supporters of deposed Egyptian President Mohamed Morsi and the Egyptian military left hundreds dead in Cairo. With anti-government demonstrations ongoing, there’s no telling what lies ahead.

Egypt is strategically important for global commerce. For one, it rests in the always volatile Middle East region, which supplies the bulk of petroleum headed for Europe and Asia. In addition, the Suez Canal lies in Egypt, and is the main route of travel for commercial shipping between Asia and Europe.

Last Thursday, Aug. 15, the VIX—so-called “fear gauge”—hit its highest mark in a month. The index, which is calculated by looking at equity options pricing, attempts to measure expected volatility within the next 30 days. Typically, the VIX moves inversely with the S&P 500, and in this case, added tensions in the Middle East has exacerbated investor fear.

Crude oil futures—both the West Texas Intermediate and North Sea Brent—shot up last Friday, with WTI reaching $107.46 per barrel and Brent settling at $110.40 per barrel.

Brent crude, which should be more susceptible to violence in the Middle East, settled at five-month highs last week following the violence in Egypt.

Egypt is hugely important to the oil industry. The Suez Canal and the Suez-Mediterranean Pipeline—both connect the Red Sea to the Mediterranean—are controlled by the country. Nearly three million barrels of oil passes through the Suez Canal per day. Another 1.5 million barrels of oil are transferred via the pipeline.

Closure, or threats of closure, will have a dramatic impact on supply, and therefore the price of oil. In addition to the effects of the canal’s closure, it remains to be seen how unrest in Egypt will affect the political and social climate in other nations in the region.

The Egyptian military knows this, and has made security at the canal a top priority. Few analysts expect a closure of the Suez Canal to be imminent.

Insurance agencies also don’t seem to be worried. “We don’t consider it necessary that shippers tell us they are going there,” Neil Roberts, an executive at insurer Lloyd’s of London, told UAE’s The National. “We are very conscious of Egyptian authorities to take the Suez as a high priority asset—to keep it running and open.”

The Suez is not on Lloyd’s “watchlist,” a list of assets considered by the insurance giant to be risky during insurance underwriting.

Even if the Suez were to close, some experts say that disruption shouldn’t be catastrophic. “There are still more than enough container ships to cope with the extra distance of sailing between Asia and Europe around the Cape of Good Hope, with transit times remaining little longer due to their reserves of speed,” according to a study by Drewry Maritime Research, an industry consultancy based in the UK.

Drewry argued that navigating around the Cape of Good Hope (at the southern tip of Africa) will allow ships to travel at slightly faster overall speeds, while the additional cost of fuel is partially offset by a recent 2 percent increase of tolls at the Suez Canal.

Frank Yu is a contributor to the Epoch Times.

Frank Yu
Frank Yu