European imports of crude oil from the Middle East are falling amid continued tension in the Red Sea off the coast of Yemen. Luckily, there is an alternative: the Atlantic Basin.
Asia, meanwhile, seems only too happy to take in more oil from the troubled Middle East—at the expense of Atlantic Basin oil.
A split is developing in oil markets, and it's anyone's guess how long it will remain in place with the oil market dynamics it brings with it.
When the Yemeni Houthis began attacking ships in the Red Sea back in November, it seemed like a minor problem—at least judging by oil traders' reaction, which was pretty much non-existent. The assumption back in November was that as soon as the Houthis became too bothersome for shippers, the U.S. Navy would step in and take action that would eliminate the problem.
The Houthis became too bothersome for shippers. The U.S. Navy stepped in and started shooting at Houthi targets on land. Only this did not have the desired effect. If anything, the U.S. reaction only made the Houthis more determined to continue attacking ships—any ships now—in the Red Sea.
Despite several countries stepping in to escort ships via the shortest route between Asia and Europe, most shippers chose to reroute their vessels around the Cape of Good Hope or combine maritime and air transport to get commodities and products from Asia to Europe. Related: Buffett-Backed Occidental CEO Says Oil Shortage by 2025
This is already taking a toll on most parties involved as both options are costlier than the Suez Canal that the Red Sea route leads to, adding to the final prices of the abovementioned commodities and goods.
Oil was no exception. The tankers that rerouted around Africa added not only a couple of weeks to more than a month to their journeys but also millions to the final bill for the oil. Increasingly cash-strapped, Europe had little choice but to look for more affordable alternatives to Middle Eastern oil that had suddenly become a headache to buy.
Europe looked west, increasing its purchases of U.S. crude oil but also crude from Guyana, Bloomberg reported this month. European buyers are also eager to pay for North Sea oil—that same North Sea oil that activists in the UK and Norway want to put an end to. For now, however, they have been unsuccessful, so Europe has some variety in its oil diet.
Asian buyers, meanwhile, are buying Middle Eastern crude at the expense of U.S. oil, data from Kpler released by Bloomberg showed. Loadings from the United States to Asia shed a third in January, the ship-tracking data provider revealed.
On the face of it, the split is a natural reaction of the oil market to the supply disruption created by the Red Sea crisis. As natural as it may be, however, this reaction could cost refiners their margins because of their constrained choice of oil, both in Europe and Asia. And if they are faced with such a prospect, refiners might decide to pass the added cost to their customers.
"Diversification is still possible, but it comes at a higher price," UBS commodity analyst Giovanni Staunovo told Bloomberg in comments on the situation with oil and the Red Sea. "Unless it can be passed onto the end consumer, it would cut into the margins of refineries."
Yet it is an interesting question just how much of the additional cost refiners could afford to pass on to the end consumer given the broader inflation situation, especially in Europe. The likely answer is "Not a lot".
With the eurozone and other EU members still struggling with higher-than-normal inflation, demand for everything, including energy, has already been subdued. Higher prices for fuels because of refiners' melting margins is not going to do anything to reverse that.
The most pressing question, then, is how long the crisis would continue. The answer, alas, is anyone's guess. For now, there is little cause for optimism. The United States has recently intensified its military responses to attacks on U.S. targets in the Middle East, and it seems this is only "the beginning".
The Houthis have not stopped attacking ships, and there appears to be a broader problem in the waters of the Red Sea: pirates. Reuters reported last month that India had deployed at least a dozen ships to the east of the Red Sea in response to increased pirate activity and had investigated more than 250 vessels in the area.
According to reports from Indian military and defense officials, since December 1, there have been at least 17 hijackings, attempts to hijack, and suspicious approaches in the Gulf of Aden and parts of the Arabian Sea that the Indian Navy has been patrolling.
"Houthis and piracy are disconnected. But pirates are trying to use this opportunity as the West's efforts are focused on the Red Sea," one official said, indicating the Red Sea conflict has already begun to spill over into surrounding regions, as analysts had predicted.
In this situation, chances are that the current fragmentation of the global oil market will continue for a while yet.
By Irina Slav for Oilprice.com
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