What Does the Red Sea Crisis Mean for Oil Prices?

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Energy shipping heavily relies on the Bab el-Mandeb Strait and the Suez Canal, located at either end of the Red Sea. These passages facilitate transport of tankers from countries like Saudi Arabia and Iraq towards Europe. The ongoing conflict in Ukraine, coupled with sanctions on Russia, have made Europe increasingly dependent on fuel products such as gasoline and diesel from the Middle East and Asia. Furthermore, Russian oil exports to India and other Asian markets have increased substantially.

According to Goldman Sachs, roughly seven million barrels of oil and its products pass through the Bab el-Mandeb Strait daily. The Suez Canal, a crucial route for U.S. liquefied natural gas shipments to Asia, has assumed increased importance.

The alternative to the Red Sea route, a journey around Africa through the Cape of Good Hope, adds approximately two weeks to the journey. This extended duration increases freight and insurance rates and could potentially raise crude oil prices by $4 per barrel, as per Goldman’s estimate.

The issues in the Red Sea might lead to a rerouting and delay of oil supplies rather than a complete halt at wells. A shift could occur with more oil being transported to Europe from Red Sea ports in western Saudi Arabia, thereby avoiding the Bab el-Mandeb Strait.

Moreover, analysts argue that it’s unlikely that the Houthis would intentionally target ships affiliated with countries they perceive as allies, like Russia and Qatar.

Until recently, a downward trend was observed in oil price due to a perceived abundance of global supply. With record levels of oil production in the U.S. and fully stocked natural gas storage facilities in Europe, the supply seems adequate. However, a sluggish demand growth is anticipated in the coming months due to the early onset of a warm winter and economic issues in China.

Traders have learned the hard way that geopolitical factors such as Russia’s invasion of Ukraine may not necessarily disrupt oil flows, making them cautious about betting on such outcomes.

While the U.S. announced on Tuesday an increased military presence in the Red Sea with the cooperation of other countries such as the U.K. and Bahrain, it remains to be seen if this will discourage the Houthis. According to analysts, this effort does not seem to provide significant additional firepower.

The most pressing question remains whether vessel owners and energy corporations will be reassured about the safety of Red Sea crossings. “Ship owners will tread carefully until they are certain that the situation has stabilized and risks have been mitigated,” commented Richard Bronze, head of geopolitics at Energy Aspects, a research firm.

How Does the Red Sea Crisis Impact Oil Prices?