The global benchmark Brent crude futures market, along with some physical markets in Europe and Africa, is experiencing tighter supply conditions due to concerns about shipping delays in the Red Sea region. These disruptions, triggered by missile and drone attacks, are among the most significant disruptions to global trade since the COVID-19 pandemic. Combined with rising Chinese demand, they are intensifying competition for crude supply routes that avoid the Suez Canal, with European markets feeling the brunt of the impact.
The market structure of Brent crude, which prices nearly 80 percent of the world's traded oil, witnessed a surge in bullish sentiment on Friday. This surge followed the diversion of tankers from the Red Sea in response to recent air strikes by the United States and the United Kingdom on targets in Yemen. Rebels from an Iran-aligned group controlling northern Yemen and its western coastline, in a bid to pressure Israel to halt its actions in Gaza and allow humanitarian aid into the Gaza Strip, have targeted vessels with perceived links to Israel in the Red Sea.
The disruptions have primarily occurred in the narrow strait of Bab al-Mandeb, which connects the Gulf of Aden to the Red Sea. Approximately 50 ships navigate this strait daily, en route to and from the Suez Canal, a critical artery for global trade. Consequently, several major shipping companies have suspended transit in the region, forcing vessels to take the longer route around the Cape of Good Hope in Southern Africa. This route has led to higher freight rates due to increased fuel, crew, and insurance costs.
Viktor Katona, the lead crude analyst at Kpler, noted, "Brent is the most impacted futures contract when it comes to Red Sea/Suez Canal disruptions." He added, "So who suffers the most on the physical front? Undoubtedly, it is European refiners." This sentiment is reflected in the market structure of Brent, which has entered backwardation, with the premium of the first-month Brent contract to the six-month contract reaching as high as $2.15 a barrel on Friday, the highest level since early November. Backwardation indicates a perception of tighter supply for immediate delivery.
The impact of these shipping disruptions is evident in reduced Middle Eastern crude oil heading to Europe, with volumes decreasing from approximately 1.07 million barrels per day (bpd) in October to around 570,000 bpd in December, according to Kpler data. Europe has become more reliant on Middle Eastern oil supplies, given sanctions against Russia, which supply one-third of the world's Brent crude. Nonetheless, measuring the specific impact of Red Sea shipping disruptions remains challenging.
Several other factors have also contributed to the tightening of the European crude oil market, including a drop in Libyan supply due to protests, lower Nigerian exports, and increasing demand for Angolan crude from China and India. China's oil trade with Iran has stalled, while India's imports of Russian crude have fallen due to currency challenges and unattractive prices.
In a notable development, Russia has surpassed Saudi Arabia to become China's top crude oil supplier in 2023, defying Western sanctions imposed over Russia's 2022 invasion of Ukraine. Russia's significant shipments of discounted oil to China have disrupted Saudi Arabia's market share, solidifying its position as the world's largest crude oil importer.
In conclusion, the missile and drone attacks in the Red Sea region, along with other factors, have led to tighter supply conditions in the global crude oil market, with European markets experiencing the most significant impact. The situation is compounded by rising Chinese demand and geopolitical tensions, all of which continue to affect the dynamics of the oil market.
