The clashes in the Middle East continue to cause concern not only on the humanitarian front but also on the economic one, with the attacks by the Houthis (supported by Iran) against the merchant ships transiting the Red Sea which inevitably rekindles concerns about the stability of the chains global sourcing.
In fact, let’s keep in mind that Approximately 30% of global trade passes through the Suez Canal (15% of global maritime traffic), but in recent weeks many cargo companies, to avoid being attacked or looted, have begun to avoid passage in the Red Sea (and therefore the Suez Canal), thus circumnavigating Africa to land in the Mediterranean
However, this route turns out to be much more expensive for shipping companies both in terms of additional costs for fuel and crew, but also in terms of time as it will cost significant delays for shipments to and from Europe.
In this context, eyes are also on the prices of the main raw materials and in particular on energy goods with i gas and oil prices which continue to remain volatile.
Gas, prices return to the lows of August 2023
After last Friday’s blaze (+4%), the european gas (Amsterdam TTF) today shows a drop of 4% to 30.7 euros per megawatt hour, close to the lowest price level since last August. Today’s decline comes despite tensions in the Red Sea and despite there being supply-side concerns.
From this point of view, the latest data on gas stocks collected by Gas Infrastrutture Europa (GIE) show how gas supplies in Europe have fallen below 80% and this is because of decidedly colder climate which has hit the Old Continent in the last week and which requires higher daily gas withdrawals.
But not only that, gas prices also decreased after the move Qatar (one of the largest LNG exporters in the world) which, according to what reported by Bloomberg, would have suspended gas shipments through the Red Sea, after US-led air strikes against Houthi targets. Let’s keep in mind that Qatar last year accounted for around 13% of Western Europe’s annual gas consumption.
But despite the critical issues we have seen, the levels of storage in Europe continue to show some resilience, with inventories remaining above the five-year average of 68% this time of year. In this sense, the latest estimates from Bloomberg estimate that European storage will end this winter season with a stock level of around 52%.
This has been affected by the timid demand for gas in the last year, in fact, according to RBC Europe analyst Adnan Dhanani “in 2023 gas demand across the European Union remained well below pre-conflict levels in the Middle East and for much of the year it was even below 2022 levels, which were already depressed.”
However, it has been observed in recent days increased volatility in the US natural gas marketdue to freezing weather conditions in much of North America which could lead to disruption of gas infrastructure and which will also lead to greater demand for gas to power heating here.
In this context, it becomes increasingly important to monitor the state of reserves in US gas storage facilities, which have decreased by 2 billion cubic meters in the last week. In any case, even overseas the current level of inventories is still above the average of the last five years, currently at 69%.
U.S. natural gas production fell to preliminary 11-month lows Sunday as frigid weather froze wells across the country, while demand for gas for heating and power generation was on track to reach record levels.
In Texas, the state’s electric grid operator, the Electric Reliability Council of Texas (ERCOT), expects electricity demand on Tuesday to surpass last summer’s all-time high and warned that electricity supplies could be insufficient on Monday and Tuesday.
The drop in U.S. gas availability so far this week has been the largest in more than a year, with supplies on track to fall by about 9.6 billion cubic feet per day (bcfd) from Jan. 8-14 to an estimated 11-month low of 98.6 bcfd on Jan. 14, according to data from financial firm LSEG.
Oil, volatility still prevails
Oil prices should also be monitored, with Brent gaining up to 4% in Friday’s session, only to then deflate slightly and now find itself at 77 dollars a barrel.
In the last few hours, around twenty ships for the transport of crude oil and fuel have stopped near the Red Sea or have turned back to avoid the transit considered increasingly risky, after the recent military response by the United States and the United Kingdom against the Houthis.
Despite the fact that geopolitical risks are increasing hour by hour, according to ING analysts there is not yet a reduction in oil supply, but from this point of view: “the longer the tensions will lastthe more the market will have to discount a greater risk of supply interruptions.”
The situation therefore remains volatile, in particular for the prices of energy goods, with both gas and oil prices potentially showing further upward spikes.
Meanwhile, a volatile week is promised for energy goods also due to the intense economic calendar. On Wednesday, China will release industrial production data for December, which will include data on crude oil production and refinery activity. OPEC will also release its latest monthly market report on the same day, which will include its 2024 outlook for the oil market.
But not only that, the International Energy Agency (IEA) will release its latest oil market report on Thursday, while China will release its second set of trade data, which will include more detailed numbers on energy trade.
The importance of the Suez Canal
It is certainly not the first time that we have underlined the importance of the Suez Canal for the entire global trade, a sort of navigable shortcut that connects the Mediterranean to the Red Sea, thus providing a direct and efficient passage between Europe and Asia.
The Suez Canal, as we see in the image below, crosses Egypt and it is one of the most vital commercial arteries in the world as it facilitates global trade.
However, the clashes in the Middle East with the repeated attacks of the Houthi militants against merchant ships, as we have seen, are limiting traffic in the Red Sea and according to data collected by the head of the Suez Canal Authority, in the first 11 days of 2024 naval traffic via Suez has collapsed by around 30% compared to the same period a year ago.
In this sense, the number of ships that passed through the canal in these first two weeks of 2024 has fallen to 544 so far, a sharp decline compared to the 777 ships that passed through Suez in the same period of 2023.
Current transit of ships through the Red Sea. Source MarineTraffic
As we were saying, the merchant ships have therefore abandoned Suez in favor of transit to South Africa, but this is driving up shipping costswhich impacts shipping prices, as well as on maritime transport insurance costs.
According to data from Freightos Terminal, Rates for shipping goods from Asia to Northern Europe have increased by 173% compared to before the attacks on ships in the Red Sea beganwith cargo lines also announcing surcharges ranging from $500 up to $2,700 per container.
The situation is also critical in the Panama Canal, the other main artery of world trade, with the number of ships here being limited due to extremely low water levels. Here it is these interruptions both in the Red Sea but also in the Panama Canal, according to analysts at Bank of America, they risk delaying the decline in inflation thus frustrating the efforts of the central banks.
Soaring shipping costs and potential disruptions in global trade routes are fueling fears of a resurgence in inflation, just as price pressures within the economy are finally starting to ease, analysts say.