Editor’s Note: To better align this weekly e-zine with The Energy Strategist, we have changed the publication’s name to The Energy Strategist Weekly from The Energy Letter. Readers will still receive an article on a weekly basis and our dedication to analyzing key trends in global energy markets won’t change.

For many financial journalists, the recent unrest in Egypt and Tunisia serves as a convenient rationale for Brent crude oil eclipsing $100 per barrel. After all, a story about geopolitics and turmoil in the Middle East is far more exciting than a discussion of oil inventories, demand and OPEC policy.

The protests in Cairo have also prompted a torrent of Internet marketing campaigns about how you can profit from the massive spike in oil prices that will occur if the Suez Canal closes to tanker traffic. One such advertisement predicts that the turmoil in Egypt will push oil to $300 per barrel; headlines about oil reaching $100 and even $200 per barrel are apparently too mundane to attract eyeballs.

Egypt’s political crisis may be the focus of journalists worldwide, but investors shouldn’t assume that these events will drive global oil markets. Crude oil prices would have surpassed $100 per barrel in the first quarter regardless of events in Egypt. And oil will reach $120 per barrel later this year regardless of political developments in northern Africa.

Egypt and Oil: The Reality

Africa produces slightly less than 10 million barrels of crude oil per day, a significant share of the 88 million barrels per day that the world consumes. Although Africa as a whole continues to grow its oil output, Egyptian production is of little consequence to global supply. 

That’s not to suggest that Egypt doesn’t produce oil. In 2009 the country flowed 742,000 barrels per day, and output has picked up from lows under 700,000 per day. But in 2009 Egypt consumed about 720,000 barrels per day; the nation’s annual oil exports are negligible.

The International Energy Agency (IEA) estimates that Egypt exported less than 100,000 barrels per day of oil in 2010 and about 60,000 barrels per day of oil products such as naphtha and jet fuel. Italy is the leading market for these exports.

Recent trends suggest Egyptian exports may dwindle in coming years: Domestic oil consumption has soared 25 to 30 percent over the past decade, while the country’s output remains well under its 1993 peak of 941,000 barrels per day. Shrinking production and rising consumption will continue to squeeze exports.

Natural gas is a slightly different story. Egypt exports nearly 20 billion cubic meters of natural gas, primarily in the form of liquefied natural gas (LNG). Italy and South Korea are the two biggest markets for Egyptian gas. But global LNG markets remain oversupplied, and prices are depressed in many markets; the loss of Egyptian supply wouldn’t change the supply and demand balance.

Libya and Algeria, on the other hand, produce about 1.65 and 1.8 million barrels per day of oil, respectively, and export significant quantities. Should the unrest in Egypt and Tunisia spread to these two countries and disrupt the oil industry, journalists’ dire forecasts might have a sliver of credence. But fear of contagion appears overblown. Despite some protests in Algeria, the status quo hasn’t come under serious threat.

Moreover, it’s not clear that unrest would disrupt production. Foreign oil companies have evacuated staff from Egypt and halted drilling activities, but the nation continues to export natural gas. Over the long term, any Egyptian government will need the revenue generated by oil and natural gas exports, limiting the likelihood of a prolonged shutdown.

The imperative to keep oil flowing in Algeria is even greater, as energy exports make up a significant portion of the country’s revenue. It’s a stretch to suggest that unrest in Egypt will disrupt Algerian oil production in the near future.

Egypt and the Suez Canal

Shipments of oil and natural gas travel through the Suez Canal, but investors should disregard the laughable suggestion that the closure of this waterway would send oil prices to $300 per barrel.

In the mid-1970s, as much as 10 percent of global oil trade passed through the canal, but times have changed. The IEA estimates that 992,000 barrels per day of crude and refined products traveled north through the Suez Canal in 2009, while about 850,000 barrels per day of oil products headed south, from the Mediterranean to the Red Sea.

The majority of the hydrocarbons shipped through the canal are refined products; only 600,000 barrels per day of crude–roughly 0.7 percent of the world’s oil supply–pass through the Suez Canal each day.

Most of the oil shipped from the Middle East to Europe, the US and Atlantic Basins travels south, around the Cape of Good Hope and into the Atlantic. These cargoes are transported by very large crude carriers (VLCC), a class of tanker that’s too large to negotiate the canal. Modern VLCCs can exceed 300,000 deadweight tons, whereas the largest tankers capable of traveling through the canal weigh in at roughly 150,000 deadweight tons.

In general, shipping oil to the Atlantic Basin via VLCC is less than or equally expensive as transporting the cargo through the Suez Canal. Over the past 30 years, the emergence of VLCCs has dramatically reduced the world’s reliance on the Suez Canal.

That being said, transporting supplies through the Suez offers a slight time advantage over other options. An oil shipment from the Persian Gulf to Gibraltar via the Suez would take about 17 days, compared to a little over a month via the Cape of Good Hope.

The Suez Canal continues to function despite the volatile situation in Egypt–and that’s unlikely to change: The Suez is Egypt’s second-largest source of revenue, after tourism. Any new government would be unlikely to threaten the Suez trade.

If the canal were to close, global oil markets wouldn’t suffer a meaningful disruption. Supplies would shift to the VLCC market, which boasts plenty of excess capacity. Despite the uptick in global oil demand, tanker rates for VLCCs and Suezmax carriers remained depressed because of a glut of new vessels.

If the markets truly worried about the closure of the Suez Canal and disruptions to global oil supply, tanker rates would spike to reflect rising demand for VLCCs. But tanker rates continue to languish, suggesting that the market remains concerned about excess capacity, not the unlikely prospect that the Suez will close.

Egypt: The SuMed Pipeline

The Suez-Mediterranean, or SuMed, pipeline stretches about 200 miles from the Red Sea, across Egypt to an offshore port on the Mediterranean. A one-way alternative to the Suez, the SuMed transports oil from south to north.

Although the pipeline boasts a maximum capacity of 2.4 million barrels per day of crude, in recent years volumes have fallen well short of this mark. In 2010 the pipeline is estimated to have carried an average of 1.1 million barrels per day of oil, less than half its peak capacity.

Investors should be even less concerned about the SuMed than the Suez Canal. For one, SuMed is unlikely to be closed for any length of time because it’s an important source of revenue. And the energy industry would reroute oil shipments via VLCC if the pipeline’s operations were disrupted.

In the past, larger tankers that can’t transit the Suez Canal sometimes offloaded part of their cargo into the SuMed, traveled through the canal, and then picked up the remainder of the load on the other side. But depressed tanker rates make it cheaper to send vessels on the longer voyage around the Cape of Good Hope than to pay the toll rates for the pipeline and canal.  

Egypt: What Risk Premium?

There’s little merit to arguments that Egypt or the Suez Canal is of fundamental importance to global oil markets.

Some pundits disavow this sophistic logic but claim that the unrest in Egypt has heightened investors’ awareness of geopolitical risks, prompting them to demand a risk premium. This is true to an extent, but the risk premium is much smaller than many imagine.

Consider that the situation in Egypt began in mid-January with a series of smaller protests and escalated on Jan. 25, when opposition groups converged in a so-called “day of rage” to protest against Mubarek’s regime.

A tightening supply and demand picture had ratcheted up oil prices well before these events.

Source: Bloomberg

This graph tracks the price of three crude oil benchmarks: West Texas Intermediate (WTI), Brent and Louisiana Light Sweet (LLS). Both Brent crude oil (a European benchmark) and LLS (another US benchmark) trade at an unusually high premium to WTI, reflecting a glut of crude oil at the WTI delivery point in Cushing, Okla.

This regional issue stems from a number of factors, including the start-up of the Keystone pipeline. This pipeline carries as much as 590,000 barrels per day of crude from Canada into Cushing, an area that lacks sufficient capacity to transport the oil to the Gulf Coast.

Because of these regional developments, investors should ignore the action in West Texas Intermediate (WTI) crude oil.

Brent crude oil began 2011 at about $95 per barrel and currently trades at roughly $99 per barrel. An increase of $4 per barrel over the past month isn’t that huge of a risk premium.

Much of this recent increase stems from the more durable but less headline-worthy fundamentals I outlined in the Jan. 25 issue of The Energy Strategist Weekly, Oil: $100 Isn’t a Magic Price.

In particular, US economic data continues to surprise to the upside. The Institute for Supply Management’s (ISM) purchasing managers index (PMI) for manufacturing surged to 60.8 in January, while the index for the non-manufacturing side of the economy jumped to 59.4. These bullish readings are consistent with US economic growth of about 4 percent.

With emerging markets still going strong, look for oil demand to once again surprise to the upside this year.

Forget Egypt and geopolitical risk. Oil is headed higher because demand is growing and supplies are tightening.

Portfolio News

Here’s the rundown of earnings announcement dates for The Energy Strategist Portfolio Holdings.

• Core Laboratories (NYSE: CLB)–Feb. 9
• Dresser-Rand (NYSE: DRC)–Feb. 25
• Eagle Rock Energy Partners LP (NSDQ: EROC)–Mar. 9
• EOG Resources (NYSE: EOG)–Feb. 19
• Linn Energy LLC (NSDQ: LINE)–Feb. 25
• North American Tanker Shipping (NYSE: NAT)–Feb. 14
• Petrobras (NYSE: PBR A)–Feb. 25
• Range Resources Corp (NYSE: RRC)–Feb. 24
• World Fuel Services Corp (NYSE: INT)–Feb. 25

Proven Reserves

• Chevron (NYSE: CVX)–Feb. 11
• Duncan Energy Partners LP (NYSE: DEP)–Feb. 17
• Eni (NYSE: E)–Feb. 16
• Enterprise Products Partners LP (NYSE: EPD)–Feb. 17
• Natural Resource Partners LP (NYSE: NRP)–Feb. 10
• Penn Virginia Resource Partners LP (NYSE: PVR)–Feb. 9
• Teekay LNG Partners LP (NYSE: TGP)–Mar. 4

• Afren (LSE: AFR)–Feb. 14
• First Solar (NSDQ: FSLR)–Feb. 18
• Joy Global (NSDQ: JOYG)–Mar. 3
• Macmahon Holdings (ASX: MAH, OTC: MCHHF)–Feb. 16
• Petrohawk Energy Corp (NYSE: HK)–Feb. 22
• Petroleum Geo-Services (Oslo: PGS, OTC: PGSVY)–Feb. 17
• Seadrill (NYSE: SDRL)–Feb. 28
• Spirit Aerosystems (NYSE: SPR)–Feb. 10