For two months, international oil and gas markets largely ignored the war between Israel and Hamas because it did not significantly affect flows of crude oil and natural gas from the Middle East and the Mediterranean.
Oil prices and European benchmark natural gas prices rose briefly in early October before falling to six-month lows in early December amid ongoing concerns about the economy and oil demand, high natural gas supplies in the Northern Hemisphere and warmer weather that limited demand for heating.
But markets may have been too complacent. The fallout from the conflict in the Middle East could still ripple through energy markets and supply chains worldwide, driving up consumer prices just as the Fed signaled a U-turn in U.S. monetary policy with the possibility of three interest rate cuts in 2024.
The latest threat to global trade, including some oil and products trade, has come from Yemen's Iran-aligned Houthis, who have continued their attacks on merchant vessels in the Red Sea and near its vital chokepoint, the Bab el-Mandeb. Street, have reinforced.
Red Sea/Suez Canal route
The Bab el-Mandeb Strait is a critical bottleneck for international oil and natural gas flows. The Suez Canal, SUMED pipeline and strait are strategic routes for oil and natural gas shipments from the Gulf to Europe and North America. Total oil shipments via these routes accounted for 12% of all oil traded by sea in the first half of 2023, and liquefied natural gas (LNG) shipments accounted for about 8% of global LNG trade, the US Energy Information Administration (EIA) said. with .
This year, oil flows through the Red Sea/Suez Canal route have surged after embargoes on Russian oil shifted Russian crude exports to Asia.
Northbound crude oil shipments through the Suez Canal and SUMED pipeline rose more than 60% in the first half of 2023 compared to 2020, according to EIA estimates, as demand in Europe and the U.S. rebounded from pandemic lows. In addition, sanctions on Russia's oil that began in early 2022 led to a shift in global trade, resulting in Europe importing more oil from the Middle East through the Suez Canal and less from Russia.
As container shipping giants and oil giant BP halt transit through the Red Sea/Suez Canal route, Europe will be most exposed to disrupted crude and product flows from the Middle East and Asia, analysts say.
Oil and shipping companies avoid the Red Sea after attacks
Following increased attacks by Houthi rebels, oil giant BP announced earlier this week that it was temporarily halting all deliveries across the Red Sea, becoming the latest major corporation to halt shipping in the region, which could impact global supply chains. Container shipping giants Maersk Tankers, AP Moller-Maersk, Hapag-Lloyd, MSC, Evergreen and CMA CGM have all said their ships would avoid the Suez Canal until the security situation improves.
The United States this week announced Operation Prosperity Guardian, a new multinational security initiative in which the United States, the United Kingdom, Bahrain, Canada, France, Italy, the Netherlands, Norway, Seychelles and Spain will jointly address security challenges in the southern Red Sea Gulf of Aden to ensure freedom of navigation.
A diversion to the southern tip of Africa could reignite inflation
But until the security situation in the region improves, many shipping companies will reroute their cargo via the southern tip of Africa. The route to the Cape of Good Hope will add weeks to shipping journeys and add additional costs and delays to global trade in goods. Freight and insurance prices have also increased in recent days.
“Since the EU embargo on Russian oil and products, the volumes of diesel and crude oil transported north in the Red Sea have skyrocketed, increasing the importance of flows across the Red Sea,” says Jay Maroo, Head of Market Intelligence & Analysis (MENA) at Vortexa said on Monday.
According to Vortexa, between January and November, about 30 tankers entered or left the Red Sea daily via the southern end (Bab el Mandeb), while 26 transited via the northern side (Suez Canal).
If ships headed to alternative waypoints like the Cape of Good Hope, travel times for oil cargoes on major routes from the Middle East to Europe, India to Europe, and Russia to India and China would increase by 58% to 129%, according to Vortexa. The largest 129% increase in the time it would take for a cargo to arrive at its destination would be on the Middle East route from the Gulf to the Mediterranean, which would take 39 days instead of 17 days, Vortexa says.
Oil and gas supplies per se are not at risk and there is an opportunity to switch to alternatives, but that will come at a price, analysts say.
“There is capacity on the market, but it comes at a price and we could see a 100% increase in ocean freight rates,” said Peter Sand, principal analyst at ocean freight rate research platform Xeneta.
“These are costs that are ultimately passed on to the consumers who purchase the goods.”
Oil and gas market fundamentals continue to dominate markets, particularly during weak year-end trading. Concerns about oil demand and natural gas weather remain key 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 the economic outlook, upending the outlook for global oil demand.
By Tsvetana Paraskova for Oilprice.com
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