Fitch Solutions believes that despite disruptions caused by the blocking of the Suez Canal, any impact on oil prices will be short-lived as the market should able to absorb the disruption in the near term.
The canal was blocked after the container ship Ever Given, owned and operated by Taiwan’s Evergreen Marine, ran aground, with efforts to dislodge it so far failing as of Fitch Solutions’ report dated March 26.
A backlog of tankers is building up and will lead to delays in both the loading and discharge of new cargoes, disrupting global supply chains. Fitch Solutions states that an estimated 5% - 10% of global trade for crude, petroleum products, and LNG are carried along the canal.
Following the incident, oil prices rose, gaining around 4.0% from its weekly low of USD60.8 ($81.76) per barrel of oil on March 23 to USD63.3 per barrel as of March 26. In addition, tanker rates and bunker fuel prices have also risen due to the blockage.
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While alternative routes exist, analysts at Fitch Solutions notes that shipping time and costs would increase. Using an example of a cargo ship from Libya to Singapore, the research house estimates that shipping costs would increase from around USD327,000 to USD687,000 if the vessel is rerouted around the Cape of Good Hope, with the trip taking more than twice as long.
The team highlights that an extended blockage will pose greater challenges to crude suppliers targeting Asia, noting that structural shifts in global trade dynamics combined with the rapid rise in Asian demand has resulted in a rise in eastbound flows from producers in North Africa, Russia, and the Commonwealth of Independent States.
For LNG, the same risk to fulfill Asian demand exists, though the team notes that Qatar remains an important supplier of LNG to Europe and a number of buyers will now face delays. While the regional market is well supplied and entering the shoulder season for gas, which should limit the impact on prices, a prolonged blockage and delays to loadings in Qatar and the US may pressure spot prices to rise.
On the whole, while price impacts are hard to gauge given that it will ultimately depend on the length of the blockage, Fitch Solutions points out that oil and gas supplies are not being lost from the market, only delayed in their delivery. While the analysts see scope for further upside to prices, they believe any increase will likely be short-lived.
“With the global demand recovery still in its infancy and following strong storage builds in most key hubs and across most products over much of the past year, the market should able to absorb the disruption in the near term,” they say.
