The impact of the Suez blockade on oil and gas

The impact of the Suez blockade on oil and gas

Under normal circumstances about 8% of LNG and about 2 million barrels of oil pass through the Suez Canal every day. In addition, 10% of the world’s trade passes through Egypt using this strategic waterway and the movement generated there translates into more than 8.5 million euros in goods.

A single day without activity could have (and has had) a devastating effect on maritime traffic and the supply of goods, generating a new era of uncertainty in the global oil and gas supply market.

The Ever Given bottleneck, anunprecedented event

On March 23, an unprecedented event threatened to block one of the world’s most important and busiest access routes, with the consequences that this could have on global supply chains.

The Suez Canal, the main commercial artery between Europe and Asia, was paralyzed by the Panamanian Ever Given, one of the world’s largest container ships, which ran aground in the canal, causing a bottleneck at one of the most strategic points of international maritime traffic and congesting the movement of more than 10% of the world’s maritime logistics.

Following the incident, on March 29th the ship ran aground,as we reported in this article, which includes official information broadcast by state television and reported by CNN.

The result, that same day, was 369 ships trapped in a tailback trying to pass through the canal on both sides of a blockade that finally ended, but after which numerous unforeseen events and other consequences were expected to be resolved in order to restore normality to the Suez Canal.

Effects during the first days of the blockade

The first days after the stranding were crucial for studying the situation, monitoring every movement that was generated and configuring a strategy with which to approach the next steps to be taken.

At that point, and even now with the vessel aground, the crucial thing is to keep under control all the operations associated with this accident in order to achieve real-time traceability to inform shippers of the transit of their goods.

During the first days of blockades, from March 23 to 28, the effects were already clear and the incident resulted in some of the following situations:

  • Significant vessel delays on all Asia, Middle East and Europe services.
  • Blank voyages in Asia to reposition schedules while ships are out of position for returns.
  • Loaded containers take longer to reposition and return, having an effect on empties as well.
  • Urgent cargoes were redirected to airfreight to avoid major incidents, but this also has an impact on rates.

Impact on the oil and gas industry once unblocked

The Suez Canal has traditionally been considered an essential route for the transport of liquefied natural gas and oil, a claim supported by data provided by Lloyd’s List Intelligence: last year some 5,163 tankers passed through the canal and moved almost 2 million barrels of oil every day.

On the other hand, official sources, such as the EIA, confirm that oil flows through this route represent close to 10% of the total amount traded worldwide, and that the same is almost true for LNG, which accounts for 8%.

Due to its importance, the impact of this incident on the sector that concerns us, oil and gas, is still an unknown and, in fact, it is in the hands of specialized analysts and economists who try to make a forecast as accurate as possible to accelerate decision making.

Regardless of this, the weight of this sector as it passes through the Suez Canal is in itself a consequence in terms of supply, which will definitely affect prices depending on available reserves.

According to Osama Rabie, head of the Suez Canal Authority (SCA), the grounding of the Ever Given has had a strong impact on the canal from day one, costing it “between US$14 million and US$15 million for each day of blockage”. In particular, he notes, “world crude oil prices rose by more than 6% immediately”.

But, is the impact on prices that this incident may cause really great? According to experts, on March 23, Brent crude already fell to 60 dollars a barrel (-4%), and then rose to 64.3 dollars. This could indicate that the impact on oil would be significant. However, current reserves are abundant (a direct consequence of the covidcrisis) and the impact of the stranding is not being substantially reflected in the price of crude oil.

Other data also support the theory that “it could have been worse”. The reserves generated during the health crisis could have been the buffer against this incident, according to consultants such as Arthur D. Little Middle East, from which they send a clear message: “If the incident had taken place at a time with greater demand for crude oil and gas, and with lower volumes of reserves and less available production capacity, there would have been a considerable increase in prices”, as well as other consequences that could have been devastating for the market.

Two other factors are also involved: routes and seasonality. It is not news that, in recent years, the largest volumes of oil and liquefied gas from the Persian Gulf have been transported directly to India or China. Likewise, the proximity to the summer season also helps, since if the bottleneck had been generated in winter or just before the start of that season, the demand for gas would have been higher and perhaps that would have caused other serious consequences.

In short, although most analysts are optimistic about the situation, without overlooking the seriousness of the matter, we still have to wait and see the real consequences of the Ever Givenstranding, an event, as we say: unprecedented.