What does the Red Sea crisis mean for oil prices?
Why it matters: A vital route for energy is under threat
The Suez Canal and the Bab el-Mandeb Strait at both ends of the Red Sea are important routes for energy shipping. Tankers from Persian Gulf countries such as Iraq and Saudi Arabia travel through the Red Sea to reach Europe. These ships have become even more important recently as the war in Ukraine and sanctions against Russia have made Europe more dependent on oil and refined products such as diesel and gasoline from the Middle East and Asia. Russian oil flows south to India and other Asian markets have also increased sharply.
Goldman Sachs estimates that about seven million barrels of oil and products per day, a significant volume, flow through the Strait of Bab el-Mandeb. The Suez Canal is also a crucial route for the transportation of liquefied natural gas from the United States to Asia, a route that is becoming increasingly important.
The main alternative to the Red Sea, a trip around Africa via the Cape of Good Hope, adds about two weeks to travel, raising freight and insurance rates and raising crude oil prices by up to $4 a barrel, Goldman estimates.
The numbers: why haven’t oil prices risen further?
It seems more likely that the situation in the Red Sea will lead to a diversion and delay of oil supplies than to a shutdown of oil wells. For example, more oil could travel to Europe from Red Sea ports in western Saudi Arabia, bypassing the need to cross the Strait of Bab el-Mandeb.
In addition, analysts say it appears unlikely that the Houthis will deliberately target ships linked to countries they consider politically friendly, including those from Russia and Qatar.
Until recently, oil prices were on a downward trajectory as traders calculated that there was sufficient supply in the world. The United States is pumping oil at record levels and Europe has loaded up its natural gas storage facilities for the winter. At the same time, analysts say oil demand growth could be weak in the coming months due to economic problems in China and a warm early winter.
Traders are convinced that geopolitical events such as Russia’s invasion of Ukraine would disrupt oil flows; perhaps they don’t want to risk money on such bets at this time.
What happens next: Efforts to reopen the route could ease pressure on prices
On Tuesday, the United States laid out what officials said would be an enhanced military presence in the Red Sea, with participation from other countries such as Britain and Bahrain. Whether it will be enough to deter the Houthis remains to be seen. So far, the effort does not appear to add much to existing firepower, analysts say.
The big question is whether ship owners and energy companies will be convinced that the crossing of the Red Sea is safe. “Vessel owners will be cautious until it is clear that the situation has stabilized and risks have been reduced,” said Richard Bronze, head of geopolitics at research firm Energy Aspects.