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Ship blocks Suez Canal
Prices jump after container ship lodges sideways in narrow entry from the Red Sea Steve Sutherlin Petroleum News
Alaska North Slope crude rocketed upward March 24 by $3.22, closing at $64.38 per barrel. West Texas Intermediate added $4.12 on the day to close at $61, while Brent closed at $64.41 for a gain of $3.62.
The gains largely erased losses from the previous day, when prices closed sharply lower in a continuation of a price correction that struck after strong gains in early March capped a rally of over 30% since the beginning of the year.
ANS fell $3.60 March 23 to $61, Brent fell $3.83 to $60.79 and WTI fell $3.79 to $57.76.
The rally March 24 was sparked after the Panama-flagged MV Ever Given - one of the world’s largest container ships - lodged sideways in the Suez Canal March 23, blocking all ship traffic from traversing the waterway.
Taiwan-based Evergreen Marine Corp., the ship’s operator, said in a statement that the Ever Given was overcome by strong winds as it entered the Suez Canal from the Red Sea.
Weather reports from Egypt said high winds and a sandstorm had buffeted the area, with winds gusting to 31 mph.
Energy intelligence firm Vortexa identified 10 tankers carrying 13 million barrels of Middle East crude that appeared be waylaid by the blockage of the canal.
More oil flows could be at risk unless the interruption is quickly resolved, Vortexa said in March 24 situation updates.
“Charterers and shipowners will be faced with the tough decision of staying put until traffic resumes, potentially incurring demurrage, or sailing around the Cape of Good Hope,” Vortexa said. “If it clears quickly the risk of impact may be minimal, but every passing hour will support oil prices as well as freight rates.”
If tankers divert to the Cape, “the increase in tonne-miles will increase tanker utilization and support rising freight rates in the short-term,” said Arthur Richier, Vortexa senior freight analyst.
50 vessels a day Vortexa said the approximate rate of backlog is approximately 50 vessels per day and any delays leading to re-routings add 15 days to a Middle East to Europe voyage.
“A short-term disruption of a day or two will not seriously impact oil markets,” said Clay Seigle, Vortexa Houston managing director, citing ample crude inventories and general weakness in European oil markets caused by new pandemic lockdowns.
If delays persist, some refineries could be caught short, especially of high-sulfur “sour crude” from sources like Saudi Arabia and Iraq, he said.
Most crude flows from the Mideast Gulf are to eastern destinations or to western ones reached by sailing all the way around Africa - therefore not directly affected by a Suez disruption, but if the disruption persists secondary effects could spread worldwide.
“Oil can bypass the Suez Canal by pipeline, but it still needs tankers to reach the refineries,” Seigle said. “If there aren’t enough available tankers in the Mediterranean, then some oil might not be delivered on time.”
Rolling delays Seigle said tankers could be late to their next assignments, comparing the situation to airline flight delays at one airport spreading across a wider area.
“If today’s loaded tankers are significantly late in making deliveries, then they’re also going to be late for their next mission,” he said. “That could be a scheduled delivery in Asia, which today seems safe from Suez Canal problems.”
As of Petroleum News press time early March 25, tugs and dredges had so far failed to dislodge the Ever Given.
According to a Seeking Alpha report, the best chance for freeing the ship may not come until March 28 or March 29, when the tide will reach a peak, said Nick Sloane, the salvage master who refloated cruise ship Costa Concordia in 2012 when it capsized off the coast of Italy.
The blockage is costing about $400 million an hour, based on initial calculations from Lloyd’s List.
Other factors Price strength March 24 may have been assisted by signs of higher gasoline demand in the United States, as the U.S. Energy Information Administration reported that gasoline stockpiles fell by 200,000 barrels.
U.S. air passenger traffic levels continued to show improvement as well. Transportation Security Administration checkpoint counts hit a new post-coronavirus high of 1,543,115 passengers March 21, versus 548,132 passengers passing checkpoints on the same day of 2020. On March 21, 2019, 2,227,181 passengers passed through TSA checkpoints.
But on March 23, the American Petroleum Institute reported a 2.9 million barrel increase in crude supplies, adding to demand fears raised by fresh pandemic lockdowns in Europe due to the proliferation of new strains of the COVID-19 virus.
Those demand fears, along with weakening oil prices in late March and rising stockpiles could spur the Organization of the Petroleum Exporting Countries and its allied producing countries to extend current production cuts. The group will hold its 15th OPEC and non-OPEC Ministerial Meeting April 1 to discuss May production levels.
Saudi Arabia is expected to announce at the April meeting whether it will extend its three-month voluntary unilateral 1 million barrel per day cut into May.
If OPEC+ holds steady on production, fears that the market correction will worsen may be overblown. In fact, an analyst quoted in a March 24 Bloomberg article thinks the correction is history.
“The market was due for a correction, but we’ve had it and now it’s over,” said Bill O’Grady, executive vice president at Confluence Investment Management in St. Louis. “The short-run outlook is looking better. More vaccines in arms and more people able to get around is all good news.”
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