What does the Red Sea crisis mean for oil prices?


The Suez Canal and the Bab el-Mandeb Strait, at both ends of the Red Sea, are important routes for energy transportation. Tankers from Persian Gulf countries such as Iraq and Saudi Arabia travel through the Red Sea to reach Europe. These vessels have become even more important recently, because the war in Ukraine and sanctions against Russia have made Europe more dependent on oil and refined products such as diesel and gasoline from the Middle East and Asia. Russian oil flows south to India and other Asian markets have also increased.

Goldman Sachs estimates that around seven million barrels a day of oil and products, a considerable volume, flow through the Bab el-Mandeb Strait. The Suez Canal is also a crucial route for shipments of liquefied natural gas from the United States to Asia, an increasingly important route.

The main alternative to the Red Sea, a voyage around Africa via the Cape of Good Hope, adds about two weeks to voyages, increasing freight and insurance rates and pushing the price of crude oil up to $4 a barrel, Goldman estimates. .

The situation in the Red Sea seems more likely to cause diversions and delays in oil supplies than the closure of wells. For example, more oil could travel to Europe from Red Sea ports in western Saudi Arabia, avoiding the need to cross the Bab el-Mandeb Strait.

Additionally, analysts say it appears unlikely that the Houthis will intentionally attack ships connected to countries they consider politically friendly, including those of Russia and Qatar.

Until recently, oil prices were on a downward trajectory as traders estimated there was abundant supply in the world. The United States is pumping oil at record levels and Europe has loaded up its natural gas storage facilities for the winter. At the same time, analysts say, oil demand growth in the coming months may be weak due to economic problems in China and a warm early winter.

Traders have been burned by betting that geopolitical events such as the Russian invasion of Ukraine would disrupt oil flows; They may not want to risk money on such bets at this time.

On Tuesday, the United States explained what officials said would be a reinforced military presence in the Red Sea, with the participation of other countries such as Great Britain and Bahrain. It remains to be seen whether it will be enough to deter the Houthis. So far, the effort doesn't appear to be adding much to existing firepower, analysts say.

The big question is whether shipowners and energy companies will be convinced that Red Sea crossings are safe. “Shipowners will be cautious until it is clear the situation stabilizes and risks reduce,” said Richard Bronze, head of geopolitics at Energy Aspects, a research firm.

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