Mar 26, 2024 - Energy & Environment

Oil's geopolitical problems are getting harder to ignore

Daily global trade volume by select shipping routes
Source: UN Global Platform, IMF PortWatch; Note: Routes shown are approximate; Chart: Deena Zaidi, Will Chase/Axios Visuals

Crude prices are increasingly at risk from geopolitical factors that are getting harder to control.

Driving the news: Continued conflict in the Red Sea is hampering global supply chains, which leads to higher prices. Meanwhile, waylaid shipments — which include barrels of crude supplies — are being forced to find alternate routes to their final destinations.

  • Oil prices closed higher on Monday, with markets increasingly pricing in geopolitical risk, rather than fears about global demand.

Why it matters: The prolonged interruptions and delayed deliveries from disrupted shipping routes are a threat to fragile supply networks and a force multiplier for stubborn inflationary pressures that refuse to die.

  • This is especially true for gasoline prices, which are steadily creeping toward $4 per gallon as winter gives way to spring in the U.S.

Catch-up quick: Ships and oil tankers have been forced to take the longer and more expensive route around Africa, diverting cargo traffic from the Suez Canal to the Cape of Good Hope after Yemen's Houthi rebels first attacked a cargo ship on Nov. 19, 2024.

  • Current developments in the Red Sea come at a time when Panama Canal transits face additional pressure because of low water levels caused by drought.

By the numbers: Trade via the Suez Canal, one of the most important global choke points and maritime waterways, plunged 50 percent in the first two months of 2024, according to International Monetary Fund (IMF) data.

  • Trade around Bab el-Mandeb chokepoint, the southern entrance to the Red Sea, more than halved since Nov. 19, falling to 1.5 million metric tons on March 19, according to data retrieved from the IMF's PortWatch platform.
  • Meanwhile, the volume of trade transiting around the Cape of Good Hope surged by an estimated 74 percent year-over-year, boosted by desperate shippers looking for alternate routes.

Zoom in: Diversions have pushed up bunker fuel demand, as ships avoid the Suez Canal and sail faster to compensate for lost time. This boosts fuel use.

  • The shipping disruption has also pushed the amount of oil in transit to record levels, with significant volumes of oil remaining on the water, according to the latest International Energy Agency's Oil Market Report (OMR).
  • In February alone, oil on the water surged by 85 million barrels as more cargoes diverted around Cape of Good Hope, as tanker attacks surged.
  • Oil on water hit its second-highest level since the height of the pandemic with nearly 1.9 billion barrels as of the end of February.

What they're saying: "If sustained, these disruptions of key international maritime waterways could cause greater upheaval in global supply chains," according to a recent United Nations Conference on Trade and Development (UNCTAD) report.

What we're watching: Oil and gas prices, of course, which are becoming a proxy for strained transmission mechanisms.

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