Reports

What a Long Suez Canal Closure Means for the Oil Price

Published on : 2021-03-26

Bloomberg - We’re probably looking now at the longest ever accidental closure of the Suez Canal, the vital trade link from the Middle East and Asia to Europe and North America, but oil markets aren’t blinking.

The container ship Ever Given — 440 meters long, 59 meters wide and riding at a depth of 15.7 meters in the water — is stuck fast, with its bow wedged into the eastern bank of the canal and its stern in the western bank. Photos showing the vessel’s bow right up to the edge of the canal suggest that almost 50 meters of the ship are aground. Getting it free isn’t simple and could take several more days.

Tight Fit

There’s not a lot of room for maneuver in the Suez Canal for a ship as big as Ever Given

Source: Suez Canal Authority and ship tracking data monitored by Bloomberg

The reaction of the oil market has been muted, however, and justifiably so. On Wednesday, when the problem first became fully apparent, crude did recover some of the previous day’s loss, but prices have begun to weaken again. The market was already coming to terms with yet another slowdown in recovery as the pandemic surges again in parts of the world. Renewed lockdowns in France and Italy have dampened the immediate outlook for European oil consumption, while U.K. politicians have warned citizens that it’s too early to consider flying off to sunny southern Europe for their holidays, undermining hopes for a rebound in air travel.

Suez Shrug

The Suez Canal blockage helped crude regain its previous day's losses, but no more than that

Source: ICE Futures Europe

Faltering demand isn’t the only reason why crude markets have been largely unmoved by the Suez blockage. A lengthy closure will cause problems for all kinds of trade, but the waterway just isn’t what it once was for oil traffic.

A long-term realignment of global crude flows has seen westbound shipments from the big Persian Gulf producers tumble. Crude shipments from the Middle East to Europe tumbled to 2.1 million barrels a day in 2019 from 3.8 million barrels a day 20 years earlier, according to BP Plc figures. They fell even further last year, after the 10 million-barrel a day output cut by members of the Organization of Petroleum Exporting Countries and their allies, including Russia.

Ship-tracking data monitored by Bloomberg show direct flows of Persian Gulf crude, predominantly from Saudi Arabia, Iraq and Kuwait, to Europe and Canada have averaged just over 460,000 barrels a day since the output cuts were implemented in May. Additional volumes of Middle Eastern crude are pumped from storage tanks on Egypt’s Mediterranean coast and don’t show up in these figures.

Slower Flow

Shipments of Persian Gulf crude through the Suez Canal tumbled with last year's output cuts

Source: Vessel tracking data monitored by Bloomberg

These countries have alternatives to the Suez Canal, too, should they wish to use them. Saudi Arabia and Kuwait, along with the United Arab Emirates, Qatar and Egypt, jointly own the Sumed pipeline, which can pump 2.5 million barrels a day of crude from the Red Sea to the Mediterranean across Egypt. Flows along this pipeline slowed to a trickle when the OPEC+ output cuts came into effect and there’s ample capacity to boost them now, helping avoid any Suez bottleneck.

Plenty of oil also flows in the other direction from Europe to Asia. Crude shipped from the North Sea to markets in Asia is usually carried on tankers that are too large to pass through the canal. They make the 17,000 mile journey to China around the southern tip of Africa so this supply is unaffected by the canal’s closure.

Eastbound shipments of crude from the Caspian Sea region, Russia and North Africa will be affected, however. A pipeline across Israel that links the Mediterranean and the Red Sea could be used, but its west-east flow is limited to about 30 million tons per year, equivalent to 600,000 barrels a day.

Ample global oil stockpiles, built up during the pandemic and still far above normal levels, also act as a buffer. European crude oil inventories at the end of January were 17 million barrels (or 5%) above year-earlier levels, while the total volume of stored refined products was up by 37 million barrels (6.5%), according to the International Energy Agency.

The oil, whether crude or refined, held up by the blockage of the Suez Canal isn’t lost either. It’s just delayed and there are ample stockpiles to weather that delay.

The biggest impact for oil trading will be if the freeing of the Ever Given takes “weeks,” as some salvage experts say it might. The longer the closure persists, the more disruption it will cause to supply contracts, leaving ships stranded far from where they need to be to pick up subsequent cargoes. It may be that the cost of hiring ships to carry oil, rather than the oil price itself, is where the impact of the blockage first becomes visible.

While that’s bad news for refiners and trading houses, it’s still relatively unimportant for the oil market generally. The pandemic and OPEC+’s output agreements are what really drive the price of crude. 

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