SUPPLY-CHAIN SECURITYShipping Oil Through Troubled Waters
Attacks on shipping in the Red Sea have had almost no impact on the oil price, despite the volume of oil shipped through the waterway surging 80% over the last two years because of the war in the Ukraine. Markets are more worried about a soft global economy and rising US and Brazilian oil production than by the prospect of interrupted oil flows, having already seen the global oil market adjust to the massive disruption caused by Russia’s invasion of its neighbor.
Attacks on shipping in the Red Sea have had almost no impact on the oil price, despite the volume of oil shipped through the waterway surging 80% over the last two years because of the war in the Ukraine.
Markets are more worried about a soft global economy and rising US and Brazilian oil production than by the prospect of interrupted oil flows, having already seen the global oil market adjust to the massive disruption caused by Russia’s invasion of its neighbor.
The oil market has fragmented over the last two years, with Russia now primarily supplying China and India while the Middle East and the United States have replaced Russia in Europe.
Flows of Russian oil travelling south through the Suez Canal rose from about 700,000 barrels a day in 2020 to 3.6 million in the first half of 2023. Flows of Middle East oil travelling north through the Suez Canal rose from 2 million to 3.5 million barrels a day in the same period, according to the US Department of Energy.
In total, oil tankers were ferrying about 9.2 million barrels a day up and down the Red Sea in the first half of 2023, up from 5.1 million barrels a day in 2021.
That translates to a lot more ‘oil-miles’, but there’s been little movement in the price. The Brent oil benchmark was at US81.63 a barrel at the beginning of November but has been below US$80 for most of the last two months.
There’s been some diversion of oil tankers since November, when Houthi militias based in Yemen started attacking ships traversing the Bab el-Mandeb Strait, the 25km-wide southern entrance to the Red Sea. BP announced that it was diverting its ships around the south of Africa, while the world’s fourth largest tanker group, Frontline, said it would avoid the Suez Canal where possible.
However, the oil tanker business is ferociously competitive with a huge number of operators. The top 30 companies control less than half of total capacity, so tanker operators will continue to run the risk of sailing through the Bab el-Mandeb Strait, weighing both the relative costs of insurance versus sailing around the south of Africa and the importance of timely delivery. Diverting large oil-tankers bound for Asia around the south of Africa adds 30 to 40 days to the voyage.
