Since mid-November, Houthi rebels in Yemen have significantly stepped up attacks on commercial shipping vessels in-transit via the lower Red Sea in retaliation for Israel’s war on Hamas in the Gaza Strip, but the market lacks consensus as to how much impact this will have on the energy trade.
Attacks by Houthi militants on ships traveling through the Red Sea and the Bab al-Mandab Strait have surged recently, increasing risk for ships passing through the Suez Canal. The Red Sea is one of the world’s most densely packed shipping channels and the most significant waterway connecting Europe to Asia and east Africa.
About 12% of global trade, including 30% of global container traffic, passes through the Red Sea, meaning that delays there can potentially affect fuel prices as well as the availability of various commodities and electronics.
Dozens of companies have already halted shipping in the Red Sea and at the Suez canal. Four of the world’s five largest container-shipping companies, namely Maersk, Hapag-Lloyd, CMA, CGM and MSC, have paused or suspended their services in the Red Sea, the route through which traffic from the Suez Canal must pass.
So, what does this portend for energy prices?
Not A Big Deal (for now)
The Suez Canal is one of the most important channels of the global oil trade. Northbound traffic worth ~3.9 million bpd this year is dominated by crude oil from Middle East producers to Europe and also middle distillates from India and the Middle East. Southbound traffic, estimated at 2.9 million bpd in 2023, comprises crude flows mainly from Russia to Asian customers, and also refined products naphtha and fuel oil.
The United States, Qatar and Russia are the leading shippers of LNG via Suez. Thankfully, Europe is not overly reliant on this route: although Qatar is the biggest active shipper of cargoes heading from the East to Europe, it provides only around 5% of net EU and UK imports.
"In reality, Qatar is the only exporter in an east-to-west direction via the Suez Canal,” Robert Songer, LNG analyst at data intelligence firm ICIS, has told Reuters.
The United States is the second largest exporter of LNG to Europe and Asia. The country has been using the Suez Canal recently as an alternative to the Panama Canal. More U.S. supply has been flowing to Europe due to constraints in the Panama Canal occasioned by drought.
Meanwhile, many U.S. cargoes headed for the Northeast Asian market have opted for the Cape of Good Hope over the Suez Canal. The Cape of Good Hope is an alternative route to Europe, but comes with a hefty price tag: travel through this route could increase Qatari voyage days by 145%, or an extra 22 days on a round-trip basis.
Overall, ~8% of global LNG shipments have passed through the Suez Canal in the current year. Of that volume, only about half passed through the Suez canal from the Atlantic Basin. "It's not a big concern for US volumes. It's more of a concern for Qatari volumes getting to Europe," Andres Rojas, associate director for LNG at S&P Global has revealed.
Last week, Goldman Sachs analysts told clients that LNG disruptions through the Suez Canal would have only limited impact on the global markets because it would not change global LNG supply by much. The Wall Street analyst, however, has acknowledged that it would result in higher shipping costs for specific routes such as exports from Qatar to Europe. Further, the negative impact could be moderated by higher exports of Qatari cargoes to the Pacific Basin while the U.S. and other Atlantic Basin exporters could increase volumes to Europe.
So far, the shipping disruptions have hardly affected oil and gas prices.
Asian spot LNG is currently quoted at $12.3 per million British thermal units (mmBtu), a range it has maintained since the start of the attacks while Henry Hub prices have tumbled nearly 25% since November 7 to trade at $2.46/MMBtu. High inventories in Europe and North Asia have played a big part in capping demand and are expected to continue doing so during the first half of 2024.
Meanwhile, oil prices have rallied to around $80 a barrel on Wednesday, but remain below their fourth-quarter average of around $83.30 a barrel. Oil prices have fallen in recent weeks thanks to mounting demand concerns as well as growing indications that the world will kick off the new year in a surplus.
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"The recent rise in oil prices is understandable, but the rally will not last, unless oil supply is materially affected," Tamas Varga of oil broker PVM has told Reuters.
But that does not mean that the Red Sea snafu will be painless for everybody. Oil freight prices have already been impacted, with rates for booking a Suezmax to transport crude from the Middle East to Europe up 25% while Insurance war risk premiums have gone up from $2,000 to $10,000 as a result of the disruption.
The true economic costs can also be staggering: back in 2021, Lloyd’s List estimated that the Ever Given held up $9.6 billion in trade daily for the six days it was stuck in the Suez Canal.
By Alex Kimani for Oilprice.com
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