Why It Matters: An important route for energy is at risk
The Suez Canal and the Bab el-Mandeb Strait at either end of the Red Sea are major routes for shipping energy. Tankers coming from Persian Gulf countries such as Iraq and Saudi Arabia travel through the Red Sea to reach Europe. These vessels have become 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 also rose.
Goldman Sachs estimates that seven million barrels a day of oil and products, a huge amount, flow through the Bab el-Mandeb Strait. The Suez Canal is also an important route for liquefied natural gas shipments from the United States to Asia, an increasingly important route.
The main alternative to the Red Sea, a trip around Africa via the Cape of Good Hope, adds about two weeks to trips, potentially increasing shipping rates by as much as $1 per barrel for crude and $4 a barrel for refined products, Goldman estimated.
The Numbers: Why didn’t the price of oil go up?
The situation in the Red Sea seems more likely to cause the re-routing and delay of oil supplies than the shutdown of wells. More oil, for example, could travel to Europe from Red Sea ports in western Saudi Arabia, without having to cross the Bab el-Mandeb Strait.
In addition, analysts said the Houthis appear to have unintentionally attacked ships connected to countries they view as politically hostile, including those from Russia and Qatar.
Until recently, oil prices were on a downward trajectory, as traders calculated that there was plenty of supply in the world. The United States is pumping oil at record levels, and Europe has loaded its natural gas storage facilities for the winter. At the same time, analysts say, oil demand growth in the coming months may be weak due to economic problems in China and a warm early winter.
Traders were under fire betting that geopolitical events such as Russia’s invasion of Ukraine would disrupt the flow of oil; they may not want to risk money on such bets at this point.
What Happens Next: Efforts to reopen the route could ease pressure on prices
On Tuesday, the United States announced what officials said would be an increased military presence in the Red Sea, with the participation of other countries such as Britain and Bahrain. Whether this will be enough to deter the Houthis remains to be seen. So far, the effort doesn’t seem to be adding much to existing firepower, analysts said.
The big question is whether ship owners and energy companies are convinced that Red Sea crossings are safe. “Vessel owners will be cautious until it is clear that the situation has stabilized and the risks are reduced,” said Richard Bronze, head of geopolitics at Energy Aspects, a research firm.
