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Energy Prices and Middle East Turmoil

February 23rd, 2011

OMAHA (Capstone Energy Services) – Antigovernment demonstrations are expanding in North Africa and the Middle East after the resignation of President Mubarak in Egypt. Libya now appears to be on the brink of civil war. The potential loss of the 1.6 million barrel per day Libyan crude exports has oil prices jumping both from the supply uncertainty and concerns that the turmoil could spread to other major oil producing countries. NYMEX crude oil climbed $7.37 per barrel on Tuesday to finish the day at $93.57 while Brent crude oil closed at $106.26 per barrel.

Ever since the demonstrations/uprisings began, Brent North Sea crude has been priced at a significant premium to NYMEX crude, as much as $20.00 per barrel higher. The lower NYMEX price reflects the storage inventory glut that exists in Cushing, OK, where the NYMEX contract is physically settled. The reason for this glut is the influx of crude oil from the newly operational Keystone Pipeline bringing Canadian crude oil down to Cushing. The last leg of this pipeline planned to deliver crude oil to the U.S. gulf coast refinery region has been significantly delayed because of environmental objections and expanding EPA and State Department regulatory requirements. With nowhere else to go, inventories have been rapidly expanding in Cushing, depressing NYMEX futures prices. Gulf Coast and East Coast crude oil deliveries, however, have been selling for up to $20.00 more than the NYMEX price, reflecting more of a Brent crude price. While there has been some talk of reversing the flow of the existing Seaway Pipeline that runs from Houston to Cushing, the owners, Enterprise Products and ConocoPhilips have indicated that the current flow will remain. The high physical prices on the coasts will most likely result in higher gasoline and fuel oil costs to all U.S. consumers.

Natural gas prices are generally shielded from these international events because the natural gas market is almost entirely domestic with very little “spill over” effect from international events. The March NYMEX natural gas contract finished Tuesday at $3.867 per MMbtu down $.009 for the session.

The 8.5% NYMEX crude oil future price gain Tuesday is a direct reflection of the reported escalating violence in Libya and a speculative expectation of continued rising prices as the turmoil continues and perhaps spreads to neighboring countries. Of growing concern is the possible negative effect that any prolonged escalation in energy and other commodities will have on the U.S. and world economic recovery both short term and long term.

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By Ed Freeman

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