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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Could Disruptions in Red Sea Trade Routes Impact Oil Prices?

  • Attacks by Houthi rebels have prompted firms like BP and major container shipping giants to temporarily suspend or avoid the Red Sea/Suez Canal route.
  • The U.S. has launched Operation Prosperity Guardian with international partners to address security challenges in the region.
  • Rerouting cargo ships via the Cape of Good Hope will add significant time to journeys and additional costs, potentially affecting global trade and contributing to inflation.

For two months, international oil and gas markets largely ignored the Israel-Hamas war as it wasn’t disrupting flows of crude oil and natural gas from the Middle East and the Mediterranean in any meaningful way.   

Oil prices and the European benchmark natural gas prices jumped briefly in early October before retreating to six-month lows in early December amid persistent concerns about economies and oil demand, high natural gas inventories in the northern hemisphere, and warmer weather limiting demand for heating.   

But markets may have been too complacent. The repercussions of the conflict in the Middle East could still impact energy markets and supply chains worldwide and drive consumer prices higher, just as the Fed signaled a pivot in the U.S. monetary policy with the potential of three interest rate cuts in 2024.  

The most recent threat to global trade, including part of oil and products trade, emerged from the Iran-aligned Houthis in Yemen, who have intensified attacks on commercial vessels in the Red Sea and near its vital chokepoint, the Bab el-Mandeb Strait.  

Red Sea/Suez Canal Route 

The Bab el-Mandeb Strait is a critical chokepoint for international oil and natural gas flows. The Suez Canal, the SUMED pipeline, and the Strait are strategic routes for Gulf oil and natural gas shipments to Europe and North America. Total oil shipments via these routes accounted for 12% of total seaborne-traded oil in the first half of 2023, and liquefied natural gas (LNG) shipments accounted for about 8% of worldwide LNG trade, the U.S. Energy Information Administration (EIA) said.

This year, oil flows through the Red Sea/Suez Canal route have jumped after the embargoes on Russian oil shifted Russia’s crude exports toward Asia. 

Per EIA estimates, in the first half of 2023, northbound crude oil flowing through the Suez Canal and SUMED pipeline increased by more than 60% from 2020, as demand in Europe and the U.S. rose from pandemic lows. In addition, the sanctions on Russia’s oil beginning in early 2022 shifted global trade, leading Europe to import more oil from the Middle East via the Suez Canal and less from Russia. 

As container shipping giants and oil supermajor BP halt transit via the Red Sea/Suez Canal route, Europe will be the most exposed to disrupted flows of crude and products from the Middle East and Asia, analysts say. 

Oil and Shipping Firms Avoid the Red Sea after Attacks

Following intensified attacks by Houthi rebels, oil supermajor BP said early this week it was temporarily suspending all shipments via the Red Sea, becoming the latest major firm to pause vessel navigation in the area that could reverberate through global supply chains. Container shipping giants Maersk Tankers, A.P. Moller-Maersk, Hapag-Lloyd, MSC, Evergreen, and CMA CGM have all said their vessels would be avoiding the Suez Canal until the security situation improves.   

The U.S. announced this week Operation Prosperity Guardian, a new multinational security initiative that will see the U.S., the UK, Bahrain, Canada, France, Italy, Netherlands, Norway, Seychelles, and Spain jointly address security challenges in the southern Red Sea and the Gulf of Aden, to ensure freedom of navigation. 

Rerouting to Africa’s Southern Tip Could Reignite Inflation 

But until the security situation in the area improves, many shipping firms will reroute cargoes via the southern tip of Africa. The Cape of Good Hope route will add weeks to vessel journeys and additional costs and delays to world trade in goods. Freight and insurance rates have also increased in recent days. 

Since the EU embargo on Russian oil and products, volumes of diesel and crude oil sailing northbound in the Red Sea have jumped, which has boosted the importance of flows via the Red Sea, Jay Maroo, Head of Market Intelligence & Analysis (MENA) at Vortexa, said on Monday. 

Between January and November, around 30 tankers entered or left the Red Sea every day via the southern end (Bab el Mandeb), while 26 transited via the northern side (Suez Canal), according to Vortexa data.   

If vessels moved to alternative waypoints such as the Cape of Good Hope, the voyage duration for oil cargoes on the main routes from the Middle East to Europe, from India to Europe, and from Russia to India and China would increase by between 58% and 129%, according to Vortexa. The biggest increase, 129%, in the time it takes for a cargo to arrive at its destination would be on the Middle East Gulf to Mediterranean route, which would take 39 days instead of 17 days, Vortexa says.    

Oil and gas supply per se isn’t threatened, and there is capacity to reroute to alternatives, but this will come at a cost, analysts say. 

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“There is capacity in the market, but it will come at a cost, and we could see ocean freight shipping rates increase by 100%,” said Peter Sand, chief analyst at ocean freight rate market intelligence platform Xeneta. 

“This is a cost that will ultimately be passed on to consumers who are buying the goods.”  

Oil and gas market fundamentals still rule the markets, especially during thinner year-end trade. Demand concerns for oil and weather for natural gas are still the primary drivers. 

But disruptions to trade routes and renewed delays in supply chains could accelerate inflation and threaten the more dovish approach to monetary policy and economic prospects, which could upend outlooks on global oil demand.   

By Tsvetana Paraskova for Oilprice.com

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  • Cihan on December 21 2023 said:
    Russia sells its oil to China and India using the Red Sea crossing. Unfortunately, the result is a skyrocket in oil prices.

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