Oil Futures Rise as Concerns Over Shipping Disruptions in Red Sea Grow

The price of oil futures saw an upward trajectory on Friday, setting the stage for weekly gains. This surge can be attributed to growing apprehension surrounding shipping disruptions in the Red Sea.

Price Action

• West Texas Intermediate crude for February delivery (CL00, +0.60% CL.1, +0.60% CLG24, +0.60%) experienced a rise of 0.8%, or 58 cents, reaching $74.47 per barrel on the New York Mercantile Exchange.
• The global benchmark, February Brent crude (BRN00, +0.45% BRNG24, +0.47%), enjoyed an increase of 0.6%, or 47 cents, hitting $79.63 per barrel on ICE Futures Europe.
• January gasoline (RBF24, +0.58%) witnessed a 0.4% rise, reaching $2.166 per gallon, while January heating oil (HOF24, +0.38%) experienced a 0.3% increase, reaching $2.677 per gallon.
• January natural gas (NGF24, +1.13%) gained 0.6%, amounting to $2.588 per million British thermal units.

Market Drivers

Both Brent and WTI are poised to achieve weekly gains of approximately 4%. The situation in the Red Sea has prompted several shipping companies to suspend shipments. This decision is a result of the ongoing drone and missile attacks by Iran-backed Houthi rebels since the commencement of the Israel-Hamas war. In response to these developments, a naval coalition led by the United States has been announced to counter these attacks.

The Impact of Low Water Levels in Panama Canal on Global Shipping

A perfect storm has erupted, as low water levels in the Panama Canal have coincided with shipping companies avoiding the Suez Canal following attacks by Houthi rebels in the Red Sea.

According to Kieran Tompkins, a commodities economist at Capital Economics, this combination of events has created significant challenges for global shipping. The low water levels in the Panama Canal, coupled with the diversion of shipping companies from the Suez Canal, have disrupted the flow of goods across key trade routes.

Challenges for Global Shipping

Shipping companies have been forced to navigate alternate routes due to the attacks by Houthi rebels in the Red Sea. This disruption, combined with the low water levels in the Panama Canal, has resulted in delays and increased costs for shipping goods internationally.

Impact on Oil Futures

In addition to the challenges faced by the shipping industry, oil futures have also been affected. Angola's recent decision to leave the Organization of the Petroleum Exporting Countries (OPEC) has raised questions about the unity and harmony within the oil cartel.

Although this move by Angola is unlikely to have an immediate impact on oil prices, it does highlight a potential vulnerability within OPEC. Many larger producers, such as the United Arab Emirates (U.A.E.), have expressed dissatisfaction with OPEC's decisions in recent times. If these producers were to follow Angola's lead and leave the organization, it could put downward pressure on oil prices.

The Future of Oil Prices

Looking ahead, it is uncertain whether oil prices will see a return to $100 a barrel in 2024. Factors such as low water levels in key canals and potential discontent within OPEC could continue to impact global shipping and oil markets.

While the situation remains challenging, it is important for stakeholders in the shipping and oil industries to monitor these developments closely and adapt their strategies accordingly.

Conclusion

The convergence of low water levels in the Panama Canal and shipping companies avoiding the Suez Canal due to attacks in the Red Sea has created a perfect storm for global shipping. This, combined with Angola's departure from OPEC, raises concerns about the stability of the oil cartel.

The future of oil prices remains uncertain, and it is crucial for industry players to stay vigilant and adaptable in these challenging times.