The configuration of the global benchmark Brent crude futures market and some physical markets in Europe and Africa indicates a tightening supply, partly due to concerns about shipping delays in the Red Sea caused by missile and drone attacks. These disruptions, the most significant since the COVID-19 pandemic, along with increasing Chinese demand, have intensified competition for crude supply not transiting the Suez Canal, particularly affecting European markets.
The market structure of Brent, which prices nearly 80 percent of the world’s traded oil, displayed its strongest bullish trend in two months on Friday. This occurred as tankers diverted from the Red Sea following recent airstrikes by the United States and the United Kingdom on targets in Yemen, exacerbating the disruptions.
Rebels from the Iran-aligned group controlling northern Yemen and its western coastline have targeted ships in the Red Sea in response to Israel’s actions in Gaza. By focusing on vessels with perceived links to Israel, the Houthis aim to compel Tel Aviv to cease the war and allow humanitarian aid into the Gaza Strip.
Houthi activity has primarily centered around the Bab al-Mandeb strait, connecting the Gulf of Aden to the Red Sea, where approximately 50 ships transit daily to and from the Suez Canal. Major shipping companies have suspended transit in the region, redirecting vessels around the Cape of Good Hope in Southern Africa. This longer route has elevated freight rates due to increased fuel, crew, and insurance costs.
The impact of Red Sea/Suez Canal disruptions is most pronounced in the Brent futures contract, with European refiners experiencing the most significant consequences. The premium from the first-month Brent contract to the six-month contract reached its highest point since early November, reflecting a perception of tighter supply for prompt delivery.
The volume of Middle Eastern crude reaching Europe has nearly halved from 1.07 million bpd in October to about 570,000 bpd in December, according to Kpler data. The strategic significance of ships traversing the Suez Canal has grown since the war in Ukraine, with Europe’s dependence on Middle Eastern oil increasing due to sanctions against Russia.
However, assessing the specific impact of Red Sea shipping is challenging, given the overall strength of the market. Various factors, including a drop in Libyan supply due to protests, lower Nigerian exports, and increased demand for Angolan crude from China and India due to issues with Iranian and Russian crude, have further tightened the European crude market.
In 2023, Russia surpassed Saudi Arabia as China’s top crude oil supplier, despite Western sanctions related to Russia’s 2022 invasion of Ukraine. Chinese customs data revealed that Russia shipped a record 107.02 million metric tonnes of crude oil to China last year, outpacing other major exporters like Saudi Arabia and Iraq. The shift in market dynamics was influenced by discounted Russian crude, resulting in a decline in Saudi Arabia’s market share due to unattractive prices.
