Oil Prices Slide as Suez Canal Waterway Traffic Eased

Oil Prices Slide as Suez Canal Waterway Traffic Eased

Oil prices fell on Monday following the refloating of the cargo ship that had blocked the Suez Canal, which impeded all waterway traffic for six days.

International benchmark Brent crude was trading at $63.22 per barrel early, representing 1.87% decrease after closing Friday at $64.43 a barrel.

American benchmark West Texas Intermediate (WTI) was at $59.62 per barrel at the same time for a 2.21% drop after it ended the previous session at $60.97 a barrel.

A 400-meter-long container ship, the Ever Given, ran aground across a single-lane stretch of the canal earlier last week.

The development halted transit in both directions on one of the world’s largest seaborne trade chokepoints.

However, after the six-day blockage, the vessel was successfully refloated early Monday, and when the disrupted supply chain normalized, prices were negatively affected.

In a tight market, analysts said supply disruption would normally push prices upward, however, at a time when the markets are struggling with a supply glut due to pandemic-induced weak demand, the opening of the canal reflected negatively on prices.

Further price declines were limited on investor hopes that major oil producers will be cautious about placing more barrels on the market due to lingering uncertainties about a demand recovery with more restrictions and lockdowns in Europe likely with the rise in coronavirus cases.

OPEC+ is scheduled to meet on April 1 to consider their output cuts after April.

On March 4, OPEC+ rolled over existing production quotas until April, excluding Kazakhstan and Russia, which were allowed marginal production increases. Saudi Arabia also decided to keep its voluntary cuts.

Last Week, Oil Closed Negative

Oil prices slipped moderately during week ending March 26 over potential demand declines from restrictions and lockdowns following a third wave of the COVID-19 pandemic.

However, these reported declines were limited with delayed oil supplies as a result of the Suez Canal blockage that hampered passage to oil tankers.

International benchmark Brent crude traded at $63.31 on Friday, posting a 0.58% decrease from Monday when trade at 0722 GMT registered at $63.68 per barrel.

American benchmark West Texas Intermediate (WTI) traded at $59.98 at the same time on Friday, dropping 1.03% relative to $60.61 a barrel on Monday.

Oil prices started the week on a negative note, primarily driven by investor jitters over a possible demand decline as several European countries announced plans to increase measures against the rising number of coronavirus cases.

The President of the European Commission, Ursula von der Leyen, warned Thursday that the EU is at the start of a third wave of the pandemic with infections on the rise again, mostly due to the variant B117.

Nonetheless, investors who took the opportunity to benefit from low oil prices have driven up demand in support of higher prices by midweek.

On Thursday, the Energy Information Administration announced that US crude oil inventories raised more than expected by 1.9 million barrels to 502.7 million barrels, relative to the market expectation of a build of 900,000 barrels.

Signaling a fall in crude demand in the world’s largest oil consumer, the data limited Wednesday’s oil price gains.

However, prices were stopped from falling further on Friday after Suez Canal tanker traffic was halted after a container ship ran aground in the canal, blocking ten tankers carrying 13 million barrels of crude oil, according to oil analytics firm Vortexa.

As rescue efforts continue in the canal, the authorities say it could take days to weeks to free the ship, raising fears of severe delays to oil supplies.

Riyadh’s announcement at dawn on Friday that a fire broke out in an oil facility after it was targeted with a projectile in the southern region of Jizan also limited further price declines.

It was noted that no casualties were reported in the attack although the kingdom said on Friday it shot down eight explosives-laden drones launched by Yemen’s Houthi rebel group towards the kingdom.

The recent blockage of traffic through the Suez Canal illustrated the recent shift in the global oil trade towards Asia’s developing economies rather than in oil transit from the Middle East to Europe or North America, according to the International Energy Agency (IEA) on Sunday.

A 400-meter-long container ship ran aground across a single-lane stretch of the canal earlier last week, halting transit in both directions on one of the world’s largest seaborne trade chokepoints.

According to maritime experts, moving the vessel out of the way could take days, if not weeks.

However, the EIA said the blockade has not wreaked havoc on oil markets so far.

“While the inventory overhang that built up last year is gradually being worked off, crude and oil product stocks globally remain at comfortable levels. And some of the world’s largest and newest tankers are anyway too big to use the canal,” the agency said.

The Suez Canal was opened in 1869 to facilitate the movement of goods between the Mediterranean and the Red Sea while avoiding the need to venture south around the Cape of Good Hope, a journey that would require an extra seven to nine days.

The IEA said the closure of the canal underscored the recent changes in the global oil trade, clarifying that the vast majority of oil transiting through the canal is not from the Middle East bound for Europe or North America, but Asia’s developing economies.

According to the agency, while the canal can accommodate all traditional clean oil product tanker sizes, very large crude carriers (VLCC) can only transit the canal when loaded below their 250,000 tonnes capacity.

It added that Suezmax crude tankers, which can carry up to 200,000 tonnes of crude oil, are specifically designed to navigate through the canal.

The agency said in recent years, the growing fleet of ultra-large crude carriers (ULCC), with deadweight ranging between 300,000 and 500,000 tonnes have reshaped crude oil routes as they can only load and offload at specially adapted ports and cannot transit fully laden through three of the world’s major chokepoints – the Strait of Malacca, the Suez Canal and the Panama Canal.

The IEA emphasized the importance of the Suez Canal in the global oil trade, transiting 5% of the world’s crude oil, 10% of oil products and 8% of LNG.

The canal also has a symbolic significance, splitting the world into two distinct regions: East of Suez, which includes the Middle East and the Asia Pacific; and West of Suez, more commonly known as the Atlantic Basin, comprising the Americas, Europe, Africa and the former Soviet Union.

While most oil trade takes place within its region, the agency said the size, direction and content of flows between them have undergone some dramatic changes over the last decade.

“Just 15 years ago, East of Suez was a net exporter of crude oil as Middle East crude production was 4 million barrels per day to 5 million barrels per day in excess of what they and Asia consumed. Europe and the US combined imported almost 5 million barrels per day of crude oil from the Middle East,” it said.

The situation reversed about a decade ago when a big oil supply surge from the US, Canada and Brazil combined with rapid economic growth in Asia flipped the crude oil balances of both hemispheres, the IEA said.

Since 2016, Asian crude oil demand has surpassed Middle Eastern crude oil exports, with the gap being filled by barrels from the Atlantic Basin.

Imports of crude oil from the Middle East to the US and Europe have fallen to just 1.2 million barrels per day (bpd) while exports from Europe and the US to the East of Suez have increased to 2 million bpd.​​​​​​​

“This trend is well reflected in Suez Canal transit figures, where eastbound crude oil flows of around 1.1 million bpd well exceed westbound flows of just 0.4 million bpd. Even including estimated volumes for the transit pipelines, eastbound crude oil shipments are higher,” the agency said, noting that varying qualities of crude oil is the main reason for bi-directional trade.

“Europe and the US export lighter grades to Asia while importing medium-heavy grades from the Middle East. However, most of the nearly 6 million bpd crude oil flow from the Atlantic Basin to the East of Suez is already taking the southern route to Asia around the Cape of the Good Hope, especially cargoes originating in North and Latin Americas and West Africa,” the agency said.

Citing its Oil 2021 report released last week, the IEA said that the dependence of East of Suez crude oil importers on the Atlantic Basin is set to increase in sharp contrast to the pre-pandemic period. The reason for this increase in oil imports into the East of Suez is the growing refining activity.

The agency said while Atlantic Basin refinery throughput, which fell to the lowest in 50 years due to Covid-19-induced lockdowns, is not expected to ever return to pre-pandemic levels, the refinery intake East of Suez suffered a less dramatic decline and will return to 2019 levels by the end of this year.

Demand grows in East of Suez

The rapid growth in East of Suez refining activity has generally matched the pace of demand growth in the region, the IEA said, elaborating that product trade between the hemispheres has seen less dramatic changes, compared to crude oil.

“Almost half of eastbound flows is fuel oil, for power generation in the Middle East or for marine bunkers, with the rest primarily consisting of naphtha and LPG cargoes, destined for Asian petrochemical crackers and Indian household consumption,” it added.

With increased crude oil and petrochemical demand in Asia, the flows through the Suez Canal are likely to rise again, the agency said.

“The current incident with the canal shutdown is happening at a time when the world is still recovering from the pandemic, with ample crude and product storage, and this has helped minimize oil supply disruption and price reaction,” it noted.

However, it pointed out that when the global economy and oil demand return to normal levels, “the Suez chokepoint will regain its importance.”

Oil Prices Slide as Suez Canal Waterway Traffic Eased