Update: Impact of the Red Sea Crisis

This earnings season, one topic that’s been top of mind for CEOs has been geopolitical tensions.

Bloomberg reports that ‘by the halfway mark in the first quarter, the number of references to the Red Sea or “geopolitics” has almost matched the total for the previous three months’.

What we cover in this article

• Oil Markets

• Impact on General Companies

  • 2022 Supply Chain Crisis vs. the Red Sea Crisis

  • What does inflation tell us?

When the crisis first started we wrote an article to gauge the impact of these shipping delays. We are now almost 2 months into the crisis, and there seems to be no alleviation in the situation.

Today we look at an update on how the Red Sea crisis has impacted markets so far and where could go from here.

Oil Markets

First, let’s talk about what’s on everyone’s mind oil. We have written about the crisis and oil increasingly, and here’s a summary of what we have been discussing.

• In 2023, just over 7 million barrels per day of crude oil flowed through the Suez Canal and the Bab el Mandeb Strait. Today, that's down to 50% to about 3.2 million bpd since the crisis started in mid-December.

• The crisis has caused temporary spikes in oil, because of the scare of escalation. However, traders are not pricing in a premium because the situation still remains contained and the spikes continue to be temporary.

• The reason that traders are not trading for a shortage is that supplies are not disrupted. There's one oil field in the Red Sea area (Jizan in Saudi Arabia) but, it doesn't have a massive contribution. Supplies are available, the issue is shipments are delayed.

• This delay has caused freight rates to go up. However, for crude oil this increase has been $0.3/bbl (+9%), and for refined products $2/bbl (+29%).

• Russia and Europe are affected, in terms of the transportation of oil through the channel but, again the impact remains limited since Europe still has solid stocks/inventory at the moment.

• The escalation is scary if the Strait of Hormuz (which is the west of Saudi Arabia, the tip of the UAE) gets blocked. This area sees about 21-22 million bpd of crude oil. But we are not there yet. Should this area shut down, we could see an additional $3 - $4 added to oil prices. As far as the crisis goes, a protracted situation could start to put pressure on oil prices. We're gradually seeing some of that as demand starts to increase, and we're likely to see this put somewhat of a floor below prices.

Impact on General Companies

As discussed in our previous article, the bigger impact is on container shipping, where good flow is down almost 60% to 80%. About 28% of the world's container ships move through the Suez Canal carrying goods such as apparel, toys, and other discretionary products. We also have bulk carriers with agriculture products that are being delayed.

The direct impact on the markets is more severe for the UK and the Euro Area than for the US.

The US East Coast ports that are impacted receive only one-third of their goods from Asia, and some of that can be rerouted to the West Coast.

Freight costs were up +300% for Europe and US freight costs have tripled over the last few weeks. Nevertheless, the freight costs are still between 20% to 30% of peak rates from 2022. So freight rates are still about 70% below peak rates. Air freight has also jumped by +24% but it’s not always conducive for all kinds of goods.

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