Suez Canal Closure Seen as Unlikely

Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's Scott Eden will join NBR on Tuesday (check local listings) to discuss how the ongoing turmoil in Egypt is impacting oil tanker stocks.

NEW YORK (TheStreet) -- Concerns have eased that the political turmoil in Egypt -- and a potential revolution in that nation -- could force the closing of the Suez Canal.

The crucial artery, through which about 4.5% of the world's oil production passes each day, is controlled by the Egyptian military and operated under the auspices of the government-owned Suez Canal Authority.

It generated some $9 billion for Egypt in 2009, the latest year for which data is available, and thus represents the nation's third-largest source of foreign currency. For that reason, analysts say, it's in no one's interest to close the canal -- neither the embattled regime hanging on to power by a thin string, nor any new government that takes its place.

The greatest concern at the moment, according to analysts, is that a labor shortage caused by the uprising or the resulting national curfew might disrupt the canal's operation.
Word on the Street

So far that hasn't materialized, with vessels proceeding normally through the waterway, according to canal officials, despite the fact that the city of Suez has seen some of the worst violence of the crisis so far. The city sits at the southern, Red Sea end of the canal.

The Suez Canal Authority's web site appeared to be down Monday morning, but that was likely because the regime of President Hosni Mubarak had cut Internet services late last week, apparently in a bid to stem communication between demonstrators.

On Friday, share prices of oil-tanker concerns shot higher as speculation raged that the canal might be at risk of closing, a circumstance that would drive rates for maritime crude transport far higher. If the Suez were to shut down, ship operators would need to re-direct their vessels around Africa's Cape of Good Hope. The longer travel times would take vessels off the market, pushing up rates. As it happens, the tanker market has performed terribly for ship owners in recent months, laid low by oversupply.

"I think investors were looking for any ray of hope, because it's just been so negative," said Natasha Boyden, shipping analyst at Cantor Fitzgerald. "Now it looks like we're back to where we started, which is stuck in the doldrums."

Tanker stocks also spiked Friday on short covering, analysts say, with short sellers unable to stomach the prospect of holding their positions through the weekend, risking the possibility of a Suez closure.

In Monday trading, the sector gave back some of the gains it had notched during the frantic Friday session. Frontline's ( FRO) stock closed down 4.4% to $25.93; Nordic American Tanker ( NAT) slipped 1.7% to $24.45; Overseas Shipholding ( OSG) lost 3.4% to $33.24, and General Maritime ( GMR), the leading decliner, surrendered 5% to $3.06. Volumes once again were heavier than normal.

The last time the Suez was shut down came in November 2004, when an oil tanker called the Tropical Brilliance ran aground inside the canal (which, unlike the Panama Canal, has no locks). The accident forced the Suez authorities to halt all traffic through the waterway for three days. Earnings for Very Large Crude Carriers, or VLCCs, already elevated at the time because of tight supply conditions, spiked 24% in the space of three weeks.

"Students of the shipping game know that the two biggest words in shipping can be 'Suez Canal,'" said one oil-tanker professional who's been involved in the business for more than 20 years.

Traders who specialize in shipping equities say that Frontline especially is the stock to play any moves in tanker rates. That's because Frontline is the alpha-male of the industry: of the publicly traded tanker outfits, the company owns the biggest ships and has the most leverage.

"If there's a play right now -- a pure play on the Suez canal -- Frontline might be the closed thing you have," said the oil-tanker pro. The company's share price is "the most sensitive trigger we can watch: that's where people put their chips on the table."

Tanker rates rose Monday, but remained weak. The going rate on the spot market for a VLCC traveling on the key Middle East-to-Far East route increased 9% to about $8,300. A year ago, the same route with the same vessel would have cost more than $83,000 a day.

The area between the Red Sea, the Nile and the Mediterranean Sea has been the site of man-made waterways since antiquity. Herodotus, Aristotle and Pliny the Elder wrote of the pharaohs and kings who financed their construction. Several times over the centuries, Nile-to-Red Sea canals became clogged with silt. In 767 A.D., the caliph Abbasid al-Mansur, wanting to block supply routes to political enemies, closed a canal connecting Cairo to the Red Sea. Napoleon Bonaparte started dreaming of a Mediterranean-Red Sea artery even before he crowned himself head of the French Empire, but the project was eventually ditched because of a series of miscalculations by his surveyors.

The Suez Crisis of 1956 caused a five-month closure of the modern canal, an event that arguably made Aristotle Onassis's fortune. At the time, he was the only major ship owner with oil tankers on the spot market. Thus, he was able to take advantage of sky-rocketing prices when his competitors couldn't.

After the Six Day War of 1967, the canal was shut down for eight years. At first, tankers rates surged and ship owners began commissioning larger and larger vessels in a kind of arms race. The competition helped invent the modern supertanker. But after the second Arab-Israeli War in 1973 sparked the Saudi oil embargo, petroleum production slowed and a global recession took hold, sinking tanker rates. The reopening of the canal in 1975 didn't help, and the shipping industry wouldn't recover until well into the 1980s.

-- Written by Scott Eden in New York

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