Several shipping companies and LNG tankers have made the decision to avoid the Red Sea following recent attacks by Yemen’s Houthi group on commercial ships in the region. The attacks have raised concerns about potential disruptions to international commerce, especially as the world continues to grapple with the effects of the COVID-19 pandemic. To address the security risks, a U.S.-led international force has begun patrolling the waters near Yemen. These attacks have also made it more dangerous for ships to reach the Suez Canal, a crucial East-West trade route.
The Suez Canal plays a vital role in global shipping, with approximately 12% of world shipping traffic passing through it. Additionally, 4-8% of global LNG cargoes have been transported through the canal in 2023. According to analytics firm Vortexa, over 8.2 million barrels per day (bpd) of crude oil and oil products have traversed the Red Sea between January and November.
This year, S&P Global Commodity Insights reported that 16.2 million metric tons (MMt), or 51% of LNG trade, has flowed from the Atlantic Basin east through the Suez Canal, with 15.7 MMt going from the Pacific Basin west through the canal. Given its significance in the global oil trade, any disruptions to the Suez Canal can have far-reaching consequences.
The disruption caused by the attacks has already had an impact on oil freight prices and insurance war risk premiums. Rates for booking a Suezmax to transport crude from the Middle East to Europe have risen by 25% in just one week. Insurance war risk premiums have also increased from $2,000 to $10,000, reflecting the heightened risk and potential damage to trade.
While the full extent of the impact remains to be seen, market players anticipate that the duration of the shipping disruptions will determine the magnitude of the effects. For now, there have been no signs of panic buying or changes in behavior from refiners. In the event of prolonged disruptions, Middle East producers of medium sour crudes may be compelled to substitute their supplies with similar-quality grades from Brazil, Guyana, or Norway.
As for LNG trade, industry players believe that any disruption caused by these attacks is not expected to have a significant impact on the global supply. Most experts suggest that LNG shipments, particularly from the United States heading to China/Asia, may experience only short-term delays if cargoes need to be rerouted. The physical risks to Suez LNG transit primarily lie in redirecting Atlantic supply to Europe, rather than inhibiting Qatari supply to Europe.
While there are certain risks associated with these recent attacks, industry experts and officials do not foresee an immediate supply crunch. High inventories in Europe and North Asia and concerns about demand are expected to limit spot price growth in the LNG market in the first half of 2024. For oil prices, recent rallies have been driven by a variety of factors, but sustained increases will depend on any significant impact on oil supply. Overall, the disruption caused by these attacks highlights the vulnerabilities and challenges faced by the global shipping industry. It serves as a reminder of the importance of security and stability in key trade routes to ensure the uninterrupted flow of goods and resources in the global market.
