Easwaran Kanason

Co - founder of NrgEdge
Last Updated: April 1, 2021
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Business Trends

So, after a week where more than 10% of global trade had to be halted, re-routed or completely disrupted, the 400m long Ever Given cargo ship that was wedged diagonally in the Suez Canal in Egypt has been unstuck. Nearly two dozen tugboats and assistance ships, along with many land salvage vehicles digging up sand, freed the massive ship after a six-day ordeal. The world cheered. Global trade was restored. About US$10 billion per day of trade, to be precise.

The Ever Given – operated by Taiwan’s Evergreen Marine – was carrying cargo as varied as tracksuits, electrical equipment and ginger when a sandstorm reduced visibility and strong winds blew the ship off course, such that its bow and stern were wedged on opposite sides of the Canal. The blockage, which happens at one of the narrowest areas of the Canal from its southern entry point from the Gulf of Suez, prevented over 300 vessels (including 24 crude oil tankers) from navigating one of the most important maritime arteries – the shortcut between Asia and Europe that shaves at least two weeks off the alternative journey through the Indian Ocean, past the Cape of Good Hope and up the coast of West Africa. When news of the Canal blockage first broke, crude oil prices jumped, although that rise was tempered by fears over fuel consumption growth as a result of new Covid-19 accelerating infections in Europe. When the Ever Given was finally freed, crude prices immediately fell by 2%.

The sensitivity of crude prices to the temporary crisis in the Suez does illustrate the hazards of maritime trade. For most part, shipping – which is the most efficient way of transporting huge amounts of cargo worldwide – travels on open seas. But it is not always smooth sailing. There are several maritime chokepoints in the world where a crisis like this can erupt. Blockage at any one of these is a tremendous disruptor, but in the world of energy trading and transport, it takes on a different dimensions because of complex geopolitics.

The EIA estimates that some 5.5 million b/d of crude oil is transported through the Suez Canal annually, mainly bringing crude oil and LNG from the Middle East to energy-hungry markets in Europe. That’s roughly 10% of global maritime oil trade, which makes the Suez the fourth busiest chokepoint for oil transit. The Ever Given crisis lasted for 6 days, but it could have easily been six weeks if it wasn’t for a favourable combination of high tides and specialist salvagers. If that happened, then the entire maritime supply chain would be chaos. Ships would have to be re-routed through the treacherous waters around South Africa, maritime brokering and insurance would be in a frenzy and onshore supply chains from High Street clothing stores to ingredients for restaurants could be affected. And it has happened before. The Six Day War between Israel and Egypt in 1967 resulted in the entire canal being closed for eight years, with both entrances littered with bombed shrapnel and ocean mines. Egypt and Israel have settled their differences since, but there is no guarantee that this can’t happen again.

And what about the 3 other maritime chokepoints, which rank above the Suez in oil transit volumes? Right at the top of the list is the Strait of Hormuz, the narrow sliver of waterway that connects the Persian Gulf to the Indian Ocean. Just 33km at its narrowest, this is the riskiest maritime chokepoint in the world in terms of crude trading. On opposites ends of the Strait are enemies – Iran on the north, and Saudi Arabia and its allies on the south. Nearly 33% of the world’s maritime oil trade passes through this small channel, making it particularly vulnerable to disruption. And it has been disrupted. Many times before. Even the threat of disruption – as Iran has wielded recently in its squabbles with Donald Trump’s USA – can send crude prices soaring. Because of that warships from the USA, UK and France are a regular presence in Hormuz, attempting to act as a deterrent if the always-volatile situation in the Middle East does flare up. It has not fully yet, but if it does, the consequences are devastating.

In second place is the Straits of Malacca. Though much wider than Hormuz, the Straits of Malacca is also far busier, since its traffic is not only focused on energy, but almost any cargo that is traded by East Asia westwards. In oil terms, about 30% of global maritime volumes pass through the Straits, which is controlled by Malaysia on one side and Indonesia on the other. And like Hormuz, there is no real alternative to the Straits of Malacca is terms of shipping traffic; alternative routes through the Indonesian archipelago are simply too narrow or too hazardous. Which is why there have been several ideas floated to reduce the risk of disruption here: slicing a canal through the Isthmus of Kra in Thailand, and perhaps (in oil terms) building oil pipelines cutting across Thailand to bypass the Strait or winding pipeline systems starting in Myanmar snaking up to China’s interior. Because the risk is there. In the 1960s, the Konfrontasi between Indonesia and Malaysia led the Straits to be used as a battleground, both weaponised and full of weapons. If that ever repeats, then more than oil is at stake.

The Cape of Good Hope in Africa is the third largest chokepoint for maritime oil trade (roughly 10%), but it is the fifth that is more risky – the Bab el-Mandab Strait between Yemen and Eriteria/Djibouti, that is the entrance to the Red Sea and the Suez Canal beyond. Any ship that passes through the Suez is most likely to pass through Bab el-Mandab, making it an equally risky flashpoint for any disruption in global oil trade. And given the instability in Yemen that has been egged on in proxy by Iran and Saudi Arabia, that conflict has occasionally spilled offshore. Not to mention the threat of pirates based in Somali that prowl these waters. 

Other marine chokepoints have a lower risk factor, though the risk is never zero. The important ones for energy are the Turkish Straits (connecting Black Sea oil to the wider world, 5% of global maritime oil trade) and the Panama Canal (increasingly important given the USA’s accelerating role in crude and LNG exports, 2%). The others – the Danish Straits and the Straits of Gibraltar – are, currently at least, quite safe. But, as the Ever Given crisis proves, disruption could occur at any time. A single ship caused a global tidal wave of interruption, heightened by increasingly complex and interlinked global supply chain. That thought will be on the minds of the entire maritime industry – and on crude oil trading – as key players start looking at ways and methods to prevent such a disaster from happening again. Hopefully.

Market Outlook:

  • Crude price trading range: Brent – US$63-65/b, WTI – US$60-62/b
  • Global crude benchmarks wobbled in the face of two opposing developments: the blockage of the Suez Canal for nearly a week due to a grounded super cargo ship, and Europe entering into a new series of lockdowns as Covid infections surge
  • However, some bullishness may be coming from OPEC+, as reports suggest that the group is likely to roll over its existing level of supply curbs from April to May, a cautious approach taken as OPEC analysis shows that oil demand recovery has slowed down and will only begin reviving after Q2 2021

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Market Outlook:

  • Crude price trading range: Brent – US$63-65/b, WTI – US$60-62/b
  • Global crude oil benchmarks edged up on a cocktail of opposing-factors, including fears of supply disruptions as Yemeni Houthi militants launched a fifth recent attack on Saudi Arabian oil infrastructure in Jubail and renewed fear of demand weakness as Covid infections rises alarmingly in certain regions, especially Europe, Brazil and India
  • The likelihood of prices returning to the US$70/b level is also unlikely, given that OPEC+ has signalled that it will begin easing supply quotas from May onwards – a decision supported by kingpin Saudi Arabia – but could be timely given recent fuels demand recovery in the US, UK, China and India, the latter having posted its stronger oil consumption figures in 15 months
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