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Escalating Red Sea Disruption Not Insignificant for Oil Markets

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Escalating Red Sea Disruption Not Insignificant for Oil Markets
 
Harry Altham
Energy Analyst, EMEA & Asia

Oil futures have had an up-and-down start to Tuesday, as macroeconomic concerns begin the counter the escalation of disruptions in the Red Sea. Today, the U.S. Federal Reserve’s Christopher Waller is due to speak at 4pm GMT; this follows a move lower in global equities as well as moves towards the dollar as central bankers poured cold water over talk of proximate interest rate cuts. 

Houthi rebels expand attacks
The Houthi rebels have vowed to target U.S. and U.K.-linked shipping in the Red Sea, after declaring them legitimate targets following a series of Allied attacks on Houthi sites in Yemen. Indeed, yesterday a U.S. dry carrier was hit in the Arabian Gulf, before even reaching the Red Sea. Several oil and product tankers (up to ten crude tankers) appeared to reroute away from the Red Sea yesterday; the extension of Houthi targets significantly increases the number of ‘at risk’ vessels in the region. 
Indeed, the rerouting of these cargoes has increased the quantity of crude oil in floating storage by around 25M bbl (150% increase versus four weeks ago); the 36M bbl currently at sea is well over double the 14.7M bbl 2023 annual high (reached in September). However, the oil is not concentrated in the Red Sea; the number of tankers in the Red Sea has dropped to an 18-month low and looks set to drop beneath 100 (only including those laden with cargo) for the first time since March 2022. 
This escalation does not change our long-term forecasts for Brent (average of $81/bbl for 2024). In fact, we are in much the same scenario as we were in December amid sporadic attacks on vessels the Houthi considered to have links to Israel, in that production facilities are not at risk and supply continues to flow to market. However, it does escalate the short run upside risks; given that a significant portion of oil cargo travelling through the Red Sea is traditionally destined for Europe, there is a heightened risk of damage, and even supply loss, due to Houthi attacks on Allied vessels; a successful attack on a tanker is a particular risk for the remainder of the week ahead. This risk extends not only to the 100 tankers in the Red Sea, but to another multitude of vessels in the Arabian Gulf.
image 87844
Source: OPEC, Refinitiv, Stonex
Most likely, a large number of these cargoes will reroute via the Cape of Good Hope, which threatens to increase the quantity of oil at sea further in the short-term. It has already caused a significant increase in tanker rates, particularly in the Aframax and VLCC categories (larger ships will be required for the navigation around Africa). As was the case in December, these outages (thus far) have not impacted production facilities but are impacting short-term supply / demand dynamics due to a distortion of vessel arrival schedules. 
This is a particularly worrying issue for diesel, as the Suez Canal typically transits 10% of the world’s middle distillate products – double that of crude oil. Moreover, European gasoil stocks only broke above the 30th percentile last week (of a five year range) (likely due to mild weather during the end of the Christmas period), and an extended period of cold weather across Northern Europe now looks set to increase demand. We fall short of declaring conditions ripe for a leg higher across the complex, but the fundamental environment is creating a short-term tightness that looks set to provide robust support over the coming days. 
Related tags: Energy

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