Posted inDRILLING & PRODUCTION

Oil falls on Suez Canal blockade breakthrough and increasing Covid-19 cases

Oil prices fell on Monday as the Suez Canal blockade is getting closer to a resolution and as global Covid-19 infections rose for a fifth consecutive week

Oil falls on Suez Canal blockade breakthrough and increasing Covid-19 cases
Oil falls on Suez Canal blockade breakthrough and increasing Covid-19 cases

The blockade at the Suez Canal caused oil prices to build up at the end of last week, as many tankers were stuck and prevented from resuming course.

When one of the world’s busiest supply routes is blocked, this understandably creates supply pressure and, as clearing the canal for normal traffic was initially forecast to even take weeks, traders added premiums to oil prices.

The previously pessimistic expectations for freeing the stuck vessel were followed by some encouraging news this morning, which hinted that a resolution to the blockade is not far away, relieving some price pressure.

The market is now pricing in expectations that traffic will return to normal within days as the stuck container ship in the Suez Canal is partially re-floated and engineers indicated that the trickiest phase to remove it from the Canal is behind us.

However, while today’s development in the Suez Canal is promising for the return of oil shipments through the water conduit, due to the large number of vessels that have accumulated, it could still be days or weeks until the canal is fully back to normal operations.

The market will soon realize that despite the positive news, even if Ever Given leaves the Canal within days, some leftover downstream ripple effects should be expected in the meantime.

Oil loadings, as well as some oil demand could be affected as manufacturers may have to close or pause production as they wait for delayed goods to arrive at plants.

Stuck oil supply could temporarily even increase some demand for the product as, until there is a permanent solution in Suez, ships may still need to take the extra-long route around the Cape of Good Hope, which increases demand for maritime bunker fuels.

Additionally, for more urgent goods, a flight cargo option could be activated instead of shipping them by vessel to join the crowd of waiting tankers, which would temporarily boost demand for jet fuel in the short-term.

Looking at the bigger picture, the Suez Canal blockade is a sobering event for the market, showing how a simple event of a vessel going off course and getting stuck can effectively stall a big chunk of the global trade.

We are in a world of automation and speed, but the oil market will forever be vulnerable to unexpected events, as the product often crosses half the world to be delivered.

After doing their homework on tanker refloating solutions and almost getting a minor degree in engineering, this morning’s news offered traders a moment to remember that the pandemic is still on.
The fifth consecutive week of rising Covid-19 cases is creating pessimism for the recovery of oil demand and adds to the downwards price pressure today.
Even as speedy vaccine campaigns in pockets of the world alleviate regional stress, much of the world is still very much in the beginning stages of the rollout, which is far from a walk in the park, failing to meet the speed that governments envisioned at the beginning of the year.

Some side-news that missed headlines over the weekend, bit is still quite important to note, is that China and Iran signed a 25-year agreement to expand ties, including in the energy sphere, which shouts oil trading.
The public show of diplomacy could give Iran the backing it needs to continue slowly ramping up oil production, which in March, we estimate already ticked close towards 2.1 million bpd, and 2.7 million bpd if condensate is included.
The bilateral agreement is a public showing that China has no plans to stop importing Iranian barrels, despite US sanctions that encourage global buyers to shy away from Tehran.

Last but not least, as exciting and unusual as the Suez blockade is, market attention is slowly shifting to the coming OPEC+ meeting.
Before the Suez blockade, oil prices had been declining rapidly due to harsh lockdowns in Europe and beyond, with worsening oil demand recovery projections.
The market is now getting increasingly interested in knowing what OPEC+ is planning for the coming months. Any further supply boost is not going to work in the favor of prices in the current oil demand environment.
Saudi Arabia’s voluntary 1 million bpd production cut was never going to last forever and traders are now getting increasingly worried that the kingdom will not hold on to it for much longer.
The coming meeting on April 1 will determine the oil price direction going forward and most market participants will likely take a break from the Easter holidays to tune in.

Staff Writer

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