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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

Brent has edged 20 cents higher this morning despite the continuing Evergrande crisis in China and the associated risks that we spoke of in yesterday morning’s report. That Brent remains significantly above $80/bbl reflects a geopolitical premium in oil markets that could ease once the U.S. response to the strike that killed three of its servicemen in Jordan becomes known. 

how large are the red sea delays?
Due to the recent escalation of tensions in the Red Sea, it is appropriate to provide an update on the extent of vessel disruption in terms of journey and arrival times. Yesterday, the Port of Barcelona declared that they were experiencing a 10-15 day delay to vessel arrivals (key for LNG), and we wanted to run some tests to see how this stacked up against a model for oil and product vessels, as well as realised journey times. This reflects journey times into the key trading hub of the ARA region, specifically using Rotterdam as the reference port. 
We need to make a few assumptions. First, we have selected the use of an Aframax vessel, because it is the most commonly used vessel to pass through the Suez Canal and because it is large enough in fuel capacity to circumnavigate Africa (the larger Suezmax and some VLCCs are also possible vessel types). Then, using freight data, we take an average Aframax vessel speed; we have used the midpoint of the six-month global average Aframax speed of 11.76 knots and the trailing two-week average of 11.85 knots, giving us an 11.81 knot average speed. We also add 1.5 days to Suez Canal journeys to account for the typical wait times to enter the canal in the Gulf of Suez. 
The net result is that journey times between Rotterdam and Singapore have increased by around 11 days, while journey times between Ras Tanura (Saudi Arabian Persian Gulf) and Rotterdam have increased by close to 16 days. Given that these two routes pass between the Indian Ocean’s two key choke points (Straits of Hormuz and Straits of Malacca (not factoring in the Bab-el-Mandeb, which is the problem area that charterers are avoiding)), all journeys originating either in the Persian Gulf or anywhere East of Arabia will be impacted within that 10-16 day range. This can rise to as many as 20 if the final destination is in the Mediterranean Sea.
Naturally, such a large increase in vessel times at sea make trading these routes significantly less profitable. The 10-20 days of additional fuel, labour and insurance costs are dissuading flows from the Middle East into Europe; crude oil arrivals from the Middle East in January (18M bbl) have fallen by around 28% since November 2023. Amid damp demand, the Brent squeeze this has caused is becoming a pressure point for European refiners – and it is them who are most feeling the heat. This is particularly relevant because China has ramped up Middle East crude purchases due to recent disputes with Iran over the prices of its oil exports, meaning that the barrels that are heading to Europe are under increasing competition. 
Moreover, China has resumed buying from one of Europe’s most obvious, non-Suez dependent places of origin: Angola. This constriction on supplies into extends to diesel; imports from India are expected to fall to their lowest level in two years; collapsing by a giant 80% m/m to just 50k bbd as the higher costs have closed the India-to-Europe arbitrage. It is this mechanism that has been tightening the European middle distillate markets in the past couple of weeks, and it is unlikely to get significant respite until those cargoes can flow more easily again.
Related tags: Energy

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