Attacks on vessels in the Red Sea pushed oil prices higher Tuesday morning, reflecting fears of a broader supply disruption to ships attempting to pass through the Suez Canal, a key international waypoint for oil and liquefied natural gas shipments traveling from the Persian Gulf to Europe and North America.
Iranian-backed Houthi rebels have stepped up attacks in recent weeks on shipping vessels in the Bab el Mandeb Strait, threatening vessels traveling toward the Suez Canal.
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U.S. Navy helicopters on Sunday repelled a Houthi attack on a vessel owned by the Danish shipping giant Maersk in the Red Sea, sinking three Houthi ships and killing 10 militants in the process.
Maersk said Tuesday that, in light of the attacks, it has decided to pause all shipping activity through the Red Sea "until further notice." Its vessels will be rerouted around Africa.
Oil markets reacted almost immediately to the Red Sea escalation on Tuesday, with futures for international oil benchmark Brent crude and U.S-based West Texas Intermediate climbing by as much as $2 per barrel in the early hours of trading before settling slightly lower at $77.53 per barrel and $72.01 per barrel, respectively.
The recent violence has also raised the specter of a broader, more protracted conflict in the Red Sea — which could spill over into commodities markets if more companies opt to pause or temporarily reroute operations away from the Suez Canal to travel around Africa's Cape of Good Hope.
At least four diesel and jet fuel tankers ferrying oil from the Middle East and India to the West are using the Cape of Good Hope route instead of the Suez Canal, according to the ship tracking company Kpler.
BP, Germany’s Hapag Lloyd, and Norway's Equinor all announced plans to reroute via Africa in recent weeks, with BP citing the “deteriorating security situation."
Much of the impact on oil and gas marches remains to be seen. While a short-term supply disruption could bring only negligible, short-term price increases, analysts said, any protracted or widespread disruption in the Red Sea could be more serious, pointing to higher freight costs, shipping times, and supply delays.
Traveling around the Cape of Good Hope adds time and costs for commodities shippers. The route is roughly 3,000 miles longer than the Red Sea journey and adds another 10 days of transit time on average, according to the freight platform Flexport.
The Suez Canal route is a major strategic path for global crude and LNG shipments — including 12% of total seaborne oil shipments and 8% of LNG shipments in the first half of 2023, according to the Energy Information Administration.
Europe also depends heavily on the Suez Canal, meaning it could feel the brunt of any delays or price pressure.
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“Any escalation of conflict in this region is certainly going to add more of a risk premium on Brent,” Bernstein senior energy analyst Neil Beveridge told CNBC, though he stressed that there have not been any major backlogs reported so far.
“We haven’t seen the Iranian naval incursions before. And as long as it really doesn’t lead to any escalation, then I don’t really see any significant impact at this level,” he added.
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