Gaza Is Making Oil and Gas Markets Twitchier

Brent crude that was trading in the $70-75 a barrel range in June, is up close to $90 a barrel and at a 10-month high. (Bloomberg)
Brent crude that was trading in the $70-75 a barrel range in June, is up close to $90 a barrel and at a 10-month high. (Bloomberg)

Summary

Attacks on ships in the Red Sea are a reminder that the war between Israel and Hamas might yet have global repercussions for energy

The war in Ukraine made traffic on the Suez Canal busier. If conflict in Gaza bottles it up, energy cargoes will be forced to take an expensive, inflationary diversion.

Oil giant BP said Monday that it would temporarily reroute tankers from their usual journey through the Red Sea because of attacks on ships by Houthi rebels from Yemen who are sympathetic to Palestinians. So far, it’s the only major energy player to take this measure, but shipping companies including A.P. Moller-Maersk and Hapag-Lloyd have also diverted cargoes, sailing them around Africa instead.

Tensions in the Red Sea sent the price of Brent crude oil and Europe’s volatile TTF natural-gas benchmark higher on Monday. However, energy prices fell again Tuesday, possibly because the U.S. said a multinational naval force will protect commercial shipments in the area.

The Red Sea is a major artery for oil and natural-gas exports. According to the U.S. Energy Information Administration, energy shipments through this route accounted for 12% of total seaborne oil trade in the first half of 2023 and 8% of global trade in liquefied natural gas.

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% 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 U.S. 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. Europe has grown more reliant on LNG imports from Qatar, which pass through the Red Sea, to replace the pipeline flows Moscow switched off last year. It is also importing more diesel from India these days.

“A prolonged disruption would force the market to shift to alternative routes that will facilitate flows but at a higher price and longer journey time," says Mark Esposito, research analyst at S&P Global.

Higher transportation prices for oil, gas and other shipped goods might interrupt the global trend of cooling inflation that has fueled bets on interest-rate cuts in recent weeks. A container ship that got stuck in the Suez Canal in 2021 became one of the most visible episodes of the supply-chain problems that pushed up inflation unexpectedly during the pandemic.

Nonetheless, most shipments are still passing through the Suez Canal as normal for now. And weak demand is still the main worry in energy markets. Both oil and natural-gas prices are below the level they were at right before Hamas launched its attack on Israel. The International Energy Agency recently cut its oil-demand forecast for the fourth quarter by almost 400,000 barrels a day. And mild weather globally has kept demand for natural gas unusually low for the time of year.

Oil markets will remain jumpy, particularly if there are any signs of problems in the Strait of Hormuz, which is the main passageway for Middle Eastern crude shipments. So far, the war between Israel and Hamas has only affected commodity flows locally, but it wouldn’t take much for that to change.

Write to Carol Ryan at carol.ryan@wsj.com

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