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Wholesale Banking

What the Red Sea crisis could mean for commodity markets

Certain shipowners have become hesitant to travel through the Red Sea and Suez Canal due to attacks by Houthis from Yemen who are backed by Iran. Rather, they are opting for the more costly and extended path across Southern Africa. What does all of this signify for the commodity markets, then?

Attacks on commercial shipping in the Red Sea have recently intensified – and there doesn't appear to be any sign of tensions easing just yet. We have also seen retaliation from the US and UK in the form of carrying out airstrikes against the Houthis in Yemen. It remains unclear how the Houthis will respond to these attacks and whether they risk dragging in other actors within the region. But clearly, escalation raises both the risk of disruptions to flows and the likelihood that more shippers will reroute around Southern Africa.

For commodity markets, the increased tension poses supply risks, with energy markets most vulnerable. However, for oil and LNG, we are not seeing any fundamental impact on supply yet. Refiners and consumers could initially face some tightness as supply chains adjust to the longer route. Given the uncertainty and the risk of a spillover, oil prices are likely to remain relatively well supported. In order to see oil prices breaking significantly higher, we will need to see even further escalation and/or a meaningful loss in oil supply.

Global oil flows

It is unsurprising that oil flows via the Red Sea are significant given the level of oil production in the region. Around 12% of total global seaborne oil trade goes through the Red Sea, alongside large flows of both crude oil and refined products. And this applies to northbound flows towards the Med and Europe, as well as southbound flows which ultimately go towards Asia.

According to the EIA, in the first half of 2023, 9.2m b/d of oil (both crude and refined products) went through the Suez Canal and SUMED pipeline. Meanwhile, 8.8m b/d went through the Bab el-Mandeb Strait, the chokepoint between Yemen and Djibouti. Volumes through the Suez and SUMED are larger, given that there will be some Saudi flows exported from the Red Sea (via the East-West crude oil pipeline) to Europe.

Since Russia’s invasion of Ukraine, there has been an increase of oil flows southbound towards Asia. This is a result of the EU’s ban on imports of Russian oil, which has seen Russian shipping to alternative destinations, particularly India and China. Some Middle Eastern countries have also taken larger volumes of Russian refined products, particularly Saudi Arabia.

Europe will also be pulling in more middle distillates from Asia and the Middle East via this route since the Russia-Ukraine war. According to Refinitiv shipping data, in 2021, middle distillate (gasoil/jet fuel) flows from the Middle East and Asia to Europe averaged a little over 490k b/d, whilst in 2023, these flows averaged almost 860k b/d. A large share of this would go via the Red Sea.

There have been announcements from a growing number of shippers that they will avoid shipping through the region and instead go around the Cape of Good Hope. While tanker traffic through the Red Sea in December held up well, it started coming under pressure in January, particularly after the US and UK airstrikes in Yemen. This obviously means longer voyage times, which could lead to some tightness in oil and products as the market adjusts. It would also reduce tanker availability and push up rates.

To find out more about the Red Sea crisis and what it could mean for commodity markets, access the full report here.