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As many as 100 tankers carrying some 56 million barrels of crude oil and fuels have been diverted from the Red Sea since Yemen’s Houthis began targeting ships there with drones and missiles.
These are 56 million barrels of crude and fuels that will take from two weeks to more than a month longer than usual to reach their destination. And the rerouting is not about to end any time soon.
The flow of oil from the Middle East to Europe has already dropped by close to 50% Al Jazeera reported earlier this month, because it is Europe that the Red Sea route serves as the shortest gateway from Asia. Now that the route is effectively closed to Western vessels, analysts believe Europe is about to experience some oil pain.
“Asia is going to be able to get its crude oil and its products and its natural gas as usual. The U.S. doesn’t buy very much from the Middle East. So it’s really an impact on Europeans,” Johnathan Lamb from investment bank Wood and Company told China’s CGTN this week.
“It means their supply lines are now much, much longer than they were when that oil could just come up through the Suez Canal. I think this is going to create a lot of challenges in shipping,” Lamb added.
Indeed, the transport disruption in the Red Sea is already creating all sorts of headaches for most industries in Europe. Earlier this month, two carmakers—Tesla and Volvo Cars—announced they would temporarily suspend manufacturing activity at two factories due to a shortage of components caused by the crisis. Three British retailers warned end prices for their products may go higher because of the rerouting of vessels around the Cape of Good Hope.
This may be only the beginning because, contrary to some analysts’ expectations, the situation is not showing any signs of changing for the better. U.S. forces are shooting at Yemeni targets in a bid to constrain the Houthis’ capacity to continue targeting ships in the Red Sea, but so far, there has been no visible result in this respect. On the contrary, the Houthis recently attacked a tanker for the first time. It probably won’t be the last.
For now, oil prices have not really reflected the supply disruption in Middle Eastern oil flows, not least because traders are once again too focused on China’s economy to notice anything else but also because it takes longer for a disruption in the form of supply delays to be felt.
Dutch ING said in a recent note that so far, there has been no fundamental impact on oil and liquefied natural gas supply from the Middle East. It added that “Refiners and consumers could initially face some tightness as supply chains adjust to the longer route” and then went on to point out that for prices to really jump, the crisis would need to escalate further and cause “a meaningful loss in oil supply.”
The bank’s analysts were no doubt thinking about supply loss occurring in the short term. Yet just as the Houthis continued shooting at ships in the Red Sea, Saudi Arabia made a decision that will have implications for the long-term supply of oil. The Kingdom ordered Aramco to stop work on a production capacity boost that would have brought its maximum possible output to 13 million barrels daily.
Currently, what Aramco calls maximum sustainable capacity stands at 12 million bpd and has been cause for comfort for many an analyst during times of output cuts. These analysts have invariably cited the abundance in spare capacity, concentrated in a handful of producers, led by Saudi Arabia.
For now, this spare capacity continues to be quite comfortable, with the Saudis’ actual production around 9 million barrels daily because of its voluntary cuts aimed at stimulating prices higher. How long it would continue to be comfortable is anyone’s guess, however, especially if U.S. shale producers go more slowly on production expansion this year compared to last year.
Meanwhile, the International Monetary Fund raised its forecast for the global economy to 3.1% for this year, citing stronger-than-expected growth in the United States—3.1% for 2023—and economic stimulus in China, whose own economy expanded by 5.2% last year.
Brighter economic growth outlooks invariably mean stronger oil demand—and stronger oil demand expectations tend to push prices higher. In the meantime, traders have yet to factor in the full implications of Middle Eastern events into their oil equations: the potential for escalation is substantial, and the likelihood for such an escalation is also significant. And it could be an escalation that causes an actual supply disruption.
Even without it, sooner or later, the impact of the tanker rerouting would sink in. Because that rerouting really adds a lot of time to the transportation of oil: “It’s not just the arrival that is delayed, the tankers have a longer route home to be filled back up,” Kpler’s lead crude oil analyst, Viktor Katona, told CNBC last week.
“You are looking at 90 days for one delivery. That is a huge amount of time. The market is underestimating the impact of the transit duration,” he said.
