Mint Explainer: The Red Sea’s importance and its economic impact

Pledged to support the Palestinian cause, Yemen's Houthis have been hijacking ships that ply the Red Sea to travel through the Suez Canal. Here's why that has raised jitters throughout the oil and gas industry.

Jocelyn Fernandes
First Published20 Dec 2023
FILE PHOTO: The Galaxy Leader cargo ship is escorted by Houthi boats in the Red Sea in this photo released on November 20, 2023.
FILE PHOTO: The Galaxy Leader cargo ship is escorted by Houthi boats in the Red Sea in this photo released on November 20, 2023. (Houthi Military Media/Handout via REUTERS)

A series of attacks on commercial vessels in the Red Sea have been reported since the Israel-Hamas war broke out on October 7, sparking fears of global supply-chain disruptions. On November 21, Galaxy Leader, an Israeli cargo vessel en route from Turkey to India, was hijacked in the Middle Eastern sea with 25 people on board by Yemen's Iran-aligned Houthi rebels.

This disruption is significant as approximately 12 percent of global shipping traffic navigates through the Red Sea and the Suez Canal.

“All ships belonging to the Israeli enemy or that deal with it will become legitimate targets," AP quoted the rebels as saying. Mohammed Abdul-Salam, the Houthis' chief negotiator and spokesman, said in a statement that the Israelis only understand “the language of force".

“The detention of the Israeli ship is a practical step that proves the seriousness of the Yemeni armed forces in waging the sea battle, regardless of its costs and costs," he added. “This is the beginning."

Also Read | Israel-Hamas war Day 75 - 10 Updates: Baby girl, born during war, died in Israeli airstrike; Hezbollah rockets attacked

Several media reports have indicated that the ship is under the ownership of Ray Car Carriers, founded by Abraham “Rami" Ungar, who is known as one of the richest men in Israel citing ownership details in public shipping databases.

Earlier, a spokesperson of Houthi rebels called on other countries to withdraw their citizens from Israeli vessels. The rebels are believed to be getting training, technical expertise, and increasingly sophisticated weapons — including drones, ballistic and cruise missiles — from Iran.

The attacks have continued and on December 3, three commercial vessels – including two Israeli ships the Unity Explorer and Number 9, were attacked by the Houthis via drone and missile.

Building Pressure

Saudi Arabia on December 7 asked the United States to show restraint in responding to attacks by Yemen's Houthis against ships in the Red Sea, two sources told Reuters, adding that Riyadh seeks to contain spillover from the Hamas-Israel war.

Riyadh, the world's top oil exporter, has watched with alarm as Houthi missiles have been fired over its territory. "They pressed the Americans about this and why the Gaza conflict should stop," one of the sources said.

The Houthi attacks during the Hamas-Israel war have elevated their profile in the Iran-aligned camp which also includes Hamas, Lebanon's Hezbollah, and Iran-backed militias in Iraq.

Also Read: Gaza is making oil and gas markets twitchier

The Houthis have emerged as a major military force in the Arabian Peninsula, with tens of thousands of fighters and a huge arsenal of ballistic missiles and armed drones.

Senior sources in the Iran-aligned camp told Reuters the Houthi attacks were part of an effort to put pressure on Washington to get Israel to halt the Gaza offensive, a goal that Iran shares with Saudi Arabia and other countries in the region.

Impact on commercial operations

Oil industry giant BP Plc has decided to pause all oil tanker shipments through the Red Sea as the Houthis escalate their attacks against merchant shipping vessels. “In light of the deteriorating security situation for shipping in the Red Sea, BP has decided to temporarily pause all transits through the Red Sea," the company said in a statement.

Other shipping companies to take this measure include AP Moller-Maersk and Hapag-Lloyd.

Leading global shipper Maersk on December 19 said all its vessels bound for the Red Sea are being re-routed for safety reasons. “We have faith that a solution enabling a return to use the Suez Canal and transiting through the Red Sea and Gulf of Aden will be introduced shortly, but at this time it remains difficult to determine exactly when this will be," Maersk said in a client advisory.

Evading the Red Sea implies that vessels are unable to utilise Egypt's Suez Canal, compelling them to take the extensive route around Africa. This elongates voyages by thousands of miles, causes delays in cargo deliveries, and results in increased fuel expenses. Additionally, this circumstance heightens the demand for vessels.

Also Read: The Houthi assault on global shipping

A company managing 44,000 seafarers previously indicated that it was recommending ship owners explore options other than the Red Sea.

"We believe that the decision to avoid the Red Sea route for crude/product cargoes will increase transport time and may put further upward pressure on freight rates if this condition persists," Massimo Bonisoli, an analyst at Equita, said.

In terms of stocks meanwhile, shipping shares experienced an upswing on various European stock exchanges following an escalation in assaults by Houthi insurgents.

The investors are wagering on the possibility of an extended disturbance to the critical passage, which facilitates East-West trade without the time and cost associated with circumnavigating Africa. This speculation is driven by the expectation that such a disruption could lead to an increase in shipping rates.

Oil prices back on high

On December 20, global benchmark Brent held above $79 a barrel after rising more than 3 percent in the previous two sessions. West Texas Intermediate was steady near $74, Bloomberg reported.

Oil prices witnessed a substantial rise on December 19, building upon the momentum from the preceding session. The uptick followed attacks by Houthi militants on ships in the Red Sea.

According to a Reuters report, Brent crude saw an increase of 71 cents, or 0.9 percent, reaching $78.66 per barrel by 1512 GMT. The US West Texas Intermediate crude for January, set to expire on December 19, rose by 88 cents to $73.35. Meanwhile, the more active February contract gained 94 cents, reaching $73.75.

Also Read: A Suez canal crisis threatens the world economy

On December 18, crude oil experienced an almost 2 percent uptick following an assault on a Norwegian-owned vessel.

Ships see rising costs, later delivery dates

"Ships are now being re-routed via the Cape of Good Hope, but not only will this add up to 10 days sailing time, it will cost up to $1 million extra in fuel for every round trip between the Far East and North Europe," Peter Sand, chief analyst at Xeneta, was quoted as saying by Reuters.

Indian exporters are also staring at a rise in shipping costs as freight lines are forced to avoid the Suez Canal and take a longer route around Africa to reach the West. Experts noted that the alternative route around the Cape of Good Hope could increase shipping time between Mundra and Rotterdam by a third, with freight rates also likely to go up.

An estimated $200 billion worth of Indian exports flows every year through the key waterway connecting the Mediterranean and the Red Sea. With the Suez Canal becoming unusable, India’s exports of manufactured goods including automotive parts, agricultural products, chemicals, textile and readymade garments, and pharmaceutical products are likely to be affected.

“Decision of several shipping lines to avoid Red Sea and go through Cape of Good Hope shall disrupt trade, causing delays and incremental costs," Shashi Kiran Shetty, founder and chairman, of Allcargo Logistics, said.

Considering the macroeconomic environment, the freight rates may not go up much due to the limited capacity for trade to absorb. However, longer transit time will impact sailing schedules and service reliability, causing delays. Should shipping lines decide to use the Red Sea, there may still be an impact, as war surcharge may increase, leading to higher costs, Shetty said.

There are alternative views too though. While the assaults on shipping have heightened the risk premium, some analysts have observed that these incidents are unlikely to significantly disrupt the supply chain.

"The actual effect on oil flows is likely to be limited. The attacks have not hit anything that would interfere with production," said John Evans of oil broker PVM.

Goldman Sachs analysts have expressed that the disturbance is unlikely to significantly impact crude and liquefied natural gas (LNG) prices. This is attributed to the availability of opportunities to redirect vessels, indicating that production should not be directly hampered.

Ukraine War re-route of goods adds strain

According to the US Energy Information Administration, energy shipments through this route accounted for 12 percent of total seaborne oil trade in the first half of 2023 and 8 percent of global trade in liquefied natural gas, the Wall Street Journal reported.

Notably, the Ukraine war has made the Suez Canal, where ships enter the Red Sea from the north, busier than it used to be. From January through November, 4.72 million barrels of oil a day moved southbound through the canal on average, a 46 percent increase on the same period of 2022, according to data from Commodities at Sea by S&P Global.

Traffic has picked up because sanctioned Russian oil cargoes have found new markets. Vessels that traditionally went to Europe or the US now travel south through the canal to Asia. India’s imports of Russian crude oil, including Kazakh grades, have risen to 1.63 million barrels a day this year compared with just 97,300 during the same period of prewar 2021.

If the route becomes riskier to navigate, it will be a headache for Moscow but also for the EU.

US announces new task force to counter Houthi threat

United States Defense Secretary Lloyd Austin announced a new maritime task force intended to protect commercial vessels traveling through the Red Sea from attacks by Houthi militants, as per a Bloomberg report.

“The recent escalation in reckless Houthi attacks originating from Yemen threatens the free flow of commerce, endangers innocent mariners, and violates international law," Austin said in a statement on December 18. “This is an international challenge that demands collective action."

Austin said the countries involved in the new task force — dubbed Operation Prosperity Guardian — include the US, the UK, Bahrain, Canada, France, Italy, the Netherlands, Norway, the Seychelles and Spain. It will be run under the umbrella of a pre-existing grouping in the region, the Combined Maritime Forces, and the leadership of its Task Force 153, which focuses on the Red Sea.

(With inputs from various Agencies)

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