Drought has reduced Panama Canal access while Yemeni insurgency has put pressure on Suez, threatening to isolate the Atlantic Basin.
European gas storage is high, which would typically drive LNG cargoes elsewhere. However, the closure of the Panama Canal has seen US exporters have to make tough decisions, balancing European prices versus longer journey times.
Meanwhile, some tankers have started avoiding Bab-el-Mandeb and the Suez Canal. The impact of Suez disruption is likely to be higher on oil transportation, than LNG.
Rystad Energy noted that TTF prices had risen on December 18, but fundamentals undercut this upward pressure.
“Longer supply lines tie up more vessels, boost freight rates, widen origin-destination spreads, and lift bunker demand,” Bank of America Global Research analysts said.
BofA has suggested closing Suez would add around 30% to transit distances for tankers, boosting fleet demand by 1-2%.
Xeneta, a freight analytics company, warned the shipping market had spiked 20% over the weekend, as companies opt to avoid the Red Sea.
Peter Sand, Xeneta chief analyst, said “it is too dangerous for many vessels to sail through the Red Sea and therefore also the Suez Canal, which is the major artery for world trade. Ships are now being re-routed via the Cape of Good Hope, but not only will this add up to 10 days sailing time, it will cost up to $1 million extra in fuel for every round trip between the Far East and North Europe.”
Attacks around Bab-el-Mandeb are putting particular pressure on petroleum transportation, BofA said, as Russian exports bypass Europe and head to Asia.
Disruption to the Suez route has more of an impact on oil flows, than LNG.
LNG volumes through the Bab-el-Mandeb are roughly flat in the first half of 2023 against 2022 and 2021, according to US Energy Information Administration (EIA).
Qatar has continued to send cargoes to Europe through Bab-el-Mandeb, London Stock Exchange Group analyst Olumide Ajayi said, although BP and Equinor have suspended Red Sea voyages.
Rystad’s Lu Ming Pang said that Europe and Asia were both well supplied with LNG, owing to robust inventories. As such, “diverting cargoes away from the Suez Canal and the Red Sea to incur a longer voyage duration is not likely to significantly shift bearish market fundamentals”.
Oil and products via the waterway have increased this year. The EIA puts total flows at 8.8 million barrels per day through Bab-el-Mandeb, from 7.1mn bpd in 2022 and 4.9mn bpd in 2021.
Sanctions are driving this increase. Europe no longer offers a safe port for Russian volumes, which are shifting to India and China. Europe, as a result of its move away from Russian oil, is importing more Middle Eastern oil.
The EIA reported that Russian oil exports accounted for 74% of southbound oil traffic via Suez in 2023. This is up from 30% in 2021. While major traders may be unwilling to take the risk of running the Houthi gauntlet, Russia may opt to accept the risk. Particularly, given Moscow’s criticism of Israel’s invasion of Gaza.
Vortexa has said only minor oil volumes will be rerouted. There are options for swapping out cargoes, to reduce transits, the consultancy said.
“The most vulnerable market is Europe’s 1.1 [million barrels per day] of diesel and jet/kero imports, with no netting out options for jet/kero.”
Confusing the picture somewhat, ships are turning off location beacons, in order to improve security.
The Panama Canal offers a key access route for US LNG exporters to send cargoes to Asia.
The Panama Canal Authority (PCA) warned of problems in October, when it said the month had been the driest for 73 years. Rainfall was down 41% against the normal volumes, with the PCA saying Gatun Lake had fallen to unprecedented levels for the time of year.
Over the summer, Gatun Lake fell to a depth of around 79 feet. It has now increased, to 81.4 feet, but is substantially below the 88 feet recorded in January 2023. The shortfall has had the greatest impact on dry bulk and LNG shipments, it said.
As a result, the PCA has authorised only 22 vessels to transit the canal every day in December. It had initially warned that this would be squeezed further, to 20 in January and 18 in February.
However, rainfall in November has remedied this problem somewhat and the PCA now expects to authorise 24 transits per day in January.
The PCA has put normal transit capacity for the canal at 34-36 vessels per day.
The US Department of Defense announced Operation Prosperity Guardian on December 18. This responded to the “recent escalation in reckless Houthi attacks originating from Yemen”, Secretary of Defense Lloyd Austin said.
The operation brings the UK, Bahrain, Canada, France, Italy, Netherlands, Norway, Seychelles and Spain in to tackle the problem. The goal, Austin said, is “ensuring freedom of navigation for all countries and bolstering regional security and prosperity”.
Saudi Arabia, which has been involved in the Yemeni conflict for some time, is notably absent from Operation Prosperity Guardian.
“Saudi officials have been extremely quiet about the situation in the Red Sea with the Houthis offering something of a pressure valve for Saudi public opinion regarding Israel’s war in Gaza,” said Risk Intelligence’s Dirk Siebels.
The maritime analyst went on to highlight challenges for the plan, particularly around how to defend against Houthi weapons. The Houthis have used unmanned drones and missiles in their attacks. However, Siebels said the use of “drone boats” would be even more challenging to defend.
The Panama Canal offers an engineering challenge. But the Houthis and their ability to carry out asymmetric warfare is more challenging.
The PCA can spend its money on plans to design its way out of the problem. It can also offer additional transit slots for auction.
Levers for change in Yemen are more limited. As was often said during the Somali pirate crisis, offshore problems stem from the onshore.
Updated at 3:51 pm with Vortexa comments and at 8:41 pm with Rystad notes.