Mideast Conflict Spurs Worry Over Oil Supply Disruptions

Israel and Palestinians in the Gaza Strip may not be oil producers, but the conflict between the two groups has elevated the geopolitical risk premium for the oil-rich Middle East region over concerns of supply disruptions should hostilities spill out to other countries.

Israel launched air strikes against Hamas targets in Gaza in mid-November following weeks of rocket and mortar attacks fired by Hamas militants into southern Israel. Israel has amassed troops at the border, readying for a ground invasion, while Egypt, Turkey and Qatar are backing Hamas. In the north, Syria remains in a bloody civil war.

Oil prices are rallying on worry over supply security in moving oil through the Suez Canal and the Suez-Mediterranean Pipeline, both controlled by Egypt. More than 500,000 barrels per day (bpd) of oil move through the canal, while the Sumed pipeline has a 2.34 million bpd capacity. Should Iran become involved, an adversary of Israel, there’s concern crude deliveries through the Strait of Hormuz, which borders Iran, could be disrupted. Roughly 20% of the crude oil consumed globally each year passes through the waterway.

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For the New York Harbor, the delivery location for the New York Mercantile Exchange gasoline (RBOB) and heating oil futures contracts, the recovery from superstorm Sandy that devastated large swaths of the region including disrupting supply channels for fuels, continues to recover.

Phillips 66 said on Saturday (11/17) it expects its 238,000 bpd Bayway Refinery in Linden, NJ, which experienced flooding, a power outage and an oil spill after shutting ahead of Sandy’s landfall on Oct. 29, to return to normal operations by the end of November. Hess resumed operations at its 70,000 bpd Port Reading refinery in N.J., which also shut ahead of Sandy. Of the 57 wholesale distribution fuel terminals in the path of Sandy, 52 are operating.

After tumbling during the week-ended Nov. 2, preliminary data from the Energy Information Administration (EIA) shows implied demand for gasoline surged 601,000 bpd to 8.908 million bpd during the week-ended Nov. 9. From Jan.1 through Nov. 9, gasoline demand is, however, trailing the comparable 2011 period by 3.5%.

On Nov. 16, the American Petroleum Institute reported the lowest U.S. oil demand for an October since 1995 at 18.4 million bpd. Gasoline demand averaged 8.6 million bpd in October API shows, which was the lowest consumption rate for an October since 2000.

“For many months, we’ve seen variations on the same theme: weak demand versus a year ago and some of the weaker demand numbers over the past decade,” said API Chief Economist John Felmy. “The simple fact is that unemployment remains high and economic growth has been extremely modest. Petroleum demand is reflecting that.”

About the Author
Brian L. Milne is the Refined Fuels Editor for Telvent DTN—a leading business-to-business provider of real-time commodity information services. Milne has been focused on the energy industry for 16 years as an analyst, journalist and editor. He can be reached at brian.milne@telventdtn.com.


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