The global oil market is experiencing significant shifts as militant attacks in the Red Sea and surging freight rates prompt changes in trade dynamics. A notable slump in tanker traffic through the Suez Canal has initiated a division of the market into two regions: one centered around the Atlantic Basin, including the North Sea and the Mediterranean, and another encompassing the Persian Gulf, the Indian Ocean, and East Asia. While crude continues to move between these areas, recent buying patterns indicate a growing disconnection.
In Europe, some refiners reportedly skipped purchases of Iraqi Basrah crude last month, while buyers from the continent are increasingly turning to cargoes from the North Sea and Guyana. In Asia, heightened demand for Abu Dhabi’s Murban crude led to a spike in spot prices in mid-January, and flows from Kazakhstan to Asia have experienced a sharp decline.
Crude loadings from the US to Asia also witnessed a significant drop, plunging by more than a third last month compared to December, as per ship-tracking data from Kpler.
The disruption in the oil market, influenced by the Red Sea crisis, is causing a temporary fragmentation, impacting import-dependent nations like India and South Korea in diversifying their oil supply sources. Refiners are facing limitations in adapting to rapidly changing market dynamics, potentially affecting their profit margins.
Viktor Katona, lead crude analyst at data analytics firm Kpler, notes, “The pivot toward logistically easier cargoes makes commercial sense, and that will be the case for as long as the Red Sea disruptions keep freight rates elevated. It’s a tough balancing act choosing between security of supply and maximizing profits.”
The decrease in oil tanker transits through the Suez Canal by 23% last month, according to Kpler, has had pronounced effects on liquefied petroleum gas and liquefied natural gas, which fell 65% and 73%, respectively.
In the product markets, flows of diesel and jet fuel from India and the Middle East to Europe, and European fuel oil and naphtha heading to Asia, have been significantly impacted. Asian prices of naphtha, a petrochemical feedstock, reached the highest point in almost two years last week due to concerns about sourcing it from Europe becoming more challenging.
The Red Sea attacks are influencing oil prices through higher transport costs, leading refiners to prioritize local sources where possible. Rates for Suezmax crude tankers from the Middle East to Northwest Europe have surged by around half since mid-December, contributing to an approximately 8% increase in the global benchmark Brent crude over the same period.
However, the delivered cost of oil to Asia from the US, where production is surging, rose by more than $2 a barrel over a three-week period in January, as reported by traders involved in the market.
While the current fragmentation is not expected to be permanent, it poses challenges for the oil industry, requiring a careful balance between securing the supply chain and navigating the complexities of changing market dynamics. The situation in the Red Sea, while not anticipated to lead to a long-term rearrangement of oil flows, presents a risk of further disruptions, especially after the recent Houthi strike on a tanker carrying Russian fuel. The geopolitical uncertainties add an additional layer of complexity to an already challenging time for refiners, particularly in Asia, emphasizing the need for flexibility in their strategies.
