Brent crude futures have jumped by $1.5 a barrel as Egypt declares a state of emergency following an attack on el-Arish airport in Sinai, state newspaper Al-Ahram reports.
Commander of the Third Field Army Osama Asakaris is reported to have said
the "state of readiness" had been raised to its highest level in the South Sinai and Suez provinces due to the attack.
The Rafah passage – the country’s border crossing with the Gaza Strip in northern Sinai – has been closed, without any indication as to when it would be reopened. Some 200 Palestinians have been turned away.
This comes hours after suspected Islamic militants attacked four sites in northern Sinai including two military checkpoints, a police station, and el-Arish airport, which houses military aircraft. One soldier was killed in the attacks.
Oil prices rocketed over concerns of a supply disruption through the Suez Canal, through which around five per cent of seaborne crude oil passes. However, two shipping sources told Reuters that Egypt's ports and the Suez canal are operating normally, with no disruption to cargo traffic. The Suez Canal authority chief later confirmed that it was secure and shipping traffic had not been affected by the attacks in Sinai.
Two days ago, the military ousted president Mohamed Morsi of the Muslim Brotherhood following mass protests. The latest developments threaten to unwind the optimism from the markets following his deposition, which saw the EGX 30 stock index jump over seven per cent and the price of crude oil fall $0.12 per barrel.
Ishaq Siddiqi, market strategist at ETX Capital, said that tensions were fuelled by the army's crackdown on Morsi's supporters. Although the Muslim Brotherhood have urged its supporters to protest peacefully, but there's "little to suggest hard line Islamists who support Morsi will refrain from violence in the coming days".
So what does this mean for oil prices and the Egyptian economy? Violence such as today’s incident will become a persist problem, leading to a possible prolonged blockade of the Suez which will cause unwanted disruption and keep oil prices elevated with the prospects for further spikes if the tensions escalate.
For Egypt’s economy which is in a dire state, splinter terrorism and violence will kill tourism, hitting the country’s services sector, foreign investors will ditch the country, and its Arab neighbours in the GCC like Saudi and Qatar will hold back injecting funds. The International Monetary Fund’s $4.8bn loan is already dead in the water, while neighbours Sudan and Libya are likely to fret over the situation in the Suez.
Israel, meanwhile, will be on high alert, as Hamas is linked with the Brotherhood, and this could prompt the Israelis to request help from the US, which has so far restrained from getting involved.