In the heart of the waters of the Red Sea, a shadow of instability has also loomed over the global oil market, which is becoming increasingly localized due to attacks and the rise in maritime transport tariffs, making supplies from closer regions more appealing. Militant attacks and soaring maritime transport tariffs have triggered a rush towards new supply routes, currently rewriting the game’s rules for oil shipping trade.
A significant decrease in tanker traffic through the Suez Canal, by about 23% in January compared to November, has initiated a sort of split in the market, with one commercial region focused on the Atlantic and the Mediterranean, and another embracing the Persian Gulf, the Indian Ocean, and East Asia. Despite the existence of supply routes between these areas via the longer and more expensive journey around the southern tip of Africa, the growing disconnect is evident in recent purchasing patterns.
Furthermore, the decrease has been even more pronounced for liquefied natural gas (LNG) traffic, with a dramatic decline of 65%, and LNG traffic, which plummeted by 73%. The fragility of traditional supply routes is driving traders to seek safer and more reliable alternatives.
In Europe, the demand for Iraqi oil is declining, while supplies from the North Sea and Guyana are gaining ground. In Asia, the surge in demand for Abu Dhabi oil has pushed spot prices up in mid-January, while flows from Kazakhstan to Asia have significantly decreased, along with those from the United States to Asia, where traffic dropped by a third in January compared to December 2023.
This temporary fragmentation is testing the ability of importing nations like India and South Korea to diversify their sources of supply. This scenario limits refiners’ flexibility in responding to evolving market dynamics, potentially undermining profit margins. In product markets, flows of diesel and jet fuel from India and the Middle East to Europe, along with diesel and naphtha heading to Asia, are experiencing significant impacts. Asian naphtha prices have reached their highest levels in almost two years, reflecting growing concerns about its availability in Europe.
The impact of the attacks in the Red Sea is reflected in global oil prices, with higher transport costs incentivizing refiners to seek closer sources of supply. Suezmax tanker rates have increased by 50% since mid-December, while the global benchmark Brent crude has seen a 6% increase.
Meanwhile, the delivered cost of oil to Asia from the United States increased by over $2 per barrel in three weeks in January, highlighting the growing complexity of the global oil market.
The situation in the Red Sea is not expected to lead to a long-term reorganization of oil flows, but it is also difficult to see a resolution of the conflict in the short term. At present, there is a significant risk of further disruptions, especially after the Houthi attack on a tanker carrying Russian fuel. This attack was notable because the Iranian-backed militant group had previously indicated that Russian and Chinese ships would not be targeted. This geopolitical uncertainty calls for a global and coordinated response to ensure stability in the global energy market.
