World fuel, the commodity most exposed by the collapse of the Red Sea

Attacks on cargo ships in the Red Sea by the Houthi rebels Yemenbacked by Iran in the context of the Gaza war, are beginning to disrupt world trade by endangering transit through a key route.

With the Suez Canal to the north and the strait Bab el-Mandeb To the south, the route through the Red Sea seems essential to the extent that it is the shortest maritime communication between Asia and the West.

El Economista prepared a report in which it warns that the world’s main shipping companies and some energy companies have already ordered their shipments to be diverted along other, longer routes that will entail higher costs. A multitude of goods and raw materials will be affected by this decision, but there is one especially exposed: jet fuel.

More than 10% of world maritime trade passes through the waters of the Red Sea. Of the two most important energy commodities, 12% of oil transported by sea worldwide and 8% of gas are also shipped by this route, according to data from the US Department of Energy (EIA).

In the case of jet fuel (jet fuel in English), the percentage that passes through the Suez Canal exceeds 30%, according to figures from the international trade analysis house Kpler. One of the ships that were almost hit by missiles last week was the Ardmore Encounter, loaded with jet fuel, flagged by the Marshall Islands and coming from Mangalore (India).

In a quick analysis after the multiplied attacks on ships at the end of last week, experts from the renowned firm point out that aviation fuel is the most exposed commodity, far above other derivatives oil such as diesel or gasoline, with 15% of world transportation taking place in the area, and also other cargoes such as grain and oilseeds -for oil extraction- (more than 10%), coal (in around 7-8%) or iron ore (approximately 2-3%). Gasoline, also derived from crude oil, represents slightly less than 5%.

“European refineries, under the pressure of new competition from emerging regions and with the rationalization of their operations as the only option, were not producing sufficient volumes for the continent’s demand. As a result, Europe has been one of the largest importers of aviation fuel, with large portions of its needs coming from producers east of Suez,” explains Fotios Katsoulas, senior trade and supply chain analyst at S&P Global, in a note. Market Intelligence.

Among the main suppliers of aviation fuel to Europe, S&P Global mentions the United Arab Emirates, Saudi Arabia and India, which before the pandemic already represented almost half of the volumes sent to Europe. The drastic change in exchange with Russia due to the war in Ukraine has made people look even more east of the Red Sea. South Korea is also referred to as one of the main exporters.

The fact that Europe has had to rely more on its Asian suppliers is combined with this disruption in the way in which this trade was taking place, which complicates the scenario. The announcement made this Monday by two renowned oil companies like the British one B.P. and the norwegian Equinor That they suspend scheduled shipments through the Red Sea sends a clear message: supplies will have to change routes, which leads to more difficulties. At least five LNG ships have changed course off the coast of Yemen since Friday. Some shipping companies like Maersk this Tuesday have already indicated the route through the Cape of Good Hope as the alternative.

The US and other Western partners have committed in recent hours to strengthening security in the area with the launch of the Operation Prosperity Guardian, an expansion of the multinational maritime force present in the waters of the Persian Gulf in the face of the attacks carried out by the Houthis in recent weeks due to the apparent lack of will to carry out bombings against the rebels in Yemen for now due to the risk of expansion of the conflict in the Middle East. However, this is not currently deterring different operators from looking for safer routes.

Choosing to skirt all of Africa to its southern tip instead of cutting through the Suez Canal means adding 40% to the travel distance, but safety takes priority. “A round trip Asia-Europe through the Suez Canal takes about 10 weeks, compared to about 13 weeks through the Cape of Good Hope. This means that a week of significant capacity diversion could have domino effects for several months, after a lag of a few weeks,” explains the UBS team specialized in maritime transport led by Cristian Nedelcu in a report for clients.

“The possible implications for the sea ​​freight rates and the profitability of ocean carriers will depend on the duration of the disruption. The longer duration of the Cape of Good Hope transit reduces the effective capacity of an Asia-Europe voyage by 25%. It is important to note that a large part of the long-term contracts between Asia and Europe are renegotiated in December (in the case of Maersk) and in January-March (in that of Hapag Lloyd), which may allow carriers to set higher rates. higher than expected if disruptions persist,” add the UBS strategists.

According to Freightos.com, a booking and payment platform for international freight transportation, the rate for that route through Suez was $2,414 for a 40-foot container on Sunday, up 62% since the end of November.

Likewise, the London-based Joint War Committee, which advises insurance underwriters on risks, marine insurance of Lloyd’s, this Monday expanded the portion of the Red Sea that it considers part of the riskiest waters in the world. That means the time during which ships need war risk coverage will increase. The cost of such coverage has increased almost 10-fold since the attacks began.

If the announcements by BP and Equinor resulted in increases that exceeded 3.5% in oil futures this Monday despite the bearish fundamentals shown by the crude oil market, the case of jet fuel deserves monitoring. He increased travel demand this winter is boosting margins at jet fuel refiners in Asia, providing a bullish point for the oil market even as the outlook for other transportation fuels weakens.

The post-pandemic air travel recovery is accelerating in China and India, while record holiday travel demand is expected in the US. The travel boom also coincides with increased demand for kerosene-type fuels, including jet fuel, in winter. This drives up the prices of aviation oil, the most profitable for Asian refiners.

The rise in jet fuel comes after years of efforts by airlines to restore flight capacity to pre-Covid levels and provides some relief for the oil market, although traders weigh the bearish outlook for the demand. The International Energy Agency (IEA) recently cut its consumption growth forecasts for the last quarter of the year by almost 400,000 barrels per day, in a weaker macroeconomic context.

“Although jet fuel represents a fairly small part of total oil consumption, we suspect that will drive much of the growth of 1.4 million barrels per day of crude oil demand that we forecast for this year. “We believe jet fuel demand could increase by 0.9 million barrels per day as international flight activity continues to grow in China and the rest of the world,” predicted Kieran Tompkins, commodities analyst at Capital Economics. in a newsletter this summer. “The growth of air transport activity in markets outside China is slowing, but, according to our estimates, it could still add 0.5 million barrels per day to aviation fuel demand in 2023,” he added.

According to Bloomberg NEF estimates, Chinese demand for jet fuel will rise to 860,000 barrels per day by the end of January 2024. This is the highest level since 2020 and an increase of almost 27% from the same date in 2023. , according to data. The country’s aviation recovery has accelerated amid the year-end holiday season, while travel restrictions were further eased last month for some foreign nationals.

In India, flights during the festive season, as well as increased business travel, also helped lift the country’s jet fuel demand above pre-pandemic levels in November, industry consultancy FGE says in a report. Jet fuel demand in Asia, excluding China, will grow by 150,000 barrels a day in 2024 and reach close to 2019 levels in the period, the firm adds.

The one known as Singapore regrade swap – a key indicator of the profitability of producing aviation fuel versus diesel – reached the highest levels since 2018 in November, according to data from PVM Oil. It is currently more than 50% above the five-year seasonal averages, according to calculations by Bloomberg.

However, despite the recovery of aviation, the possibility that this year there will be warmer temperatures that the average could hinder the use of kerosene, which is used for heating in winter. JP Morgan analysts estimate that a milder winter could reduce seasonal kerosene consumption in the US, Europe and Japan by between 500,000 and 700,000 barrels per day, which would reduce the bullish momentum in middle distillates.

“Global demand for distillates will not plummet next year, and we continue to expect refining margins (crack spreads) are well above the pre-crisis averages. Looking ahead to 2024, we believe that the contribution of distillates to the growth of global oil demand will be close to 60% of the 1.1 million barrels per day we forecast, mainly led by jet fuel and, potentially, by a cyclical recovery in diesel demand in the second half of the year. All in all, as global trade growth remains moderate, a major rebound is unlikely in the next one or two quarters,” says the Bank of America (BofA) commodities team led by Francisco Blanch in your latest newsletter.

“The situation means an increase in shipping costs and some delays in short-term deliveries. All these costs will have a direct impact on consumers”says Henning Gloystein, director of the research company Eurasia Group.

(Note from El Economista de España)