What a single vessel can do to the global oil market is remarkable. The stuck vessel in the Suez Canal created the visual definition of a supply route bottleneck, effectively disrupting one of the world’s busiest routes for all commodities.
The oil market scrambled yesterday to price in the supply delivery trouble that the Suez blockade created but such events – after they get resolved – have no lasting impact to oil prices, only creating interim price spikes.
The destination of the oil tankers that can’t cross the Canal is mostly Europe, but Europe is also now the continent that is imposing the strictest lockdowns and where oil demand is decreasing rather than requiring more product.
If Europe was in a better state in its Covid-19 battle, then the disruption would possibly create a more prolonged issue but this is not the case. That is why traders today quickly corrected some of the previous day’s gains.
The Suez Canal is a major supply route, but not the only one, so the market will not really be hit with any major imbalance, except if the bottleneck persists for much longer than expected.
However, it is unlikely that efforts to resolve the issue and resume normal traffic will take more than a few days. Yet the downside risk exists and if weeks are needed to free the vessel, oil prices will be affected.
The market will be waiting for news coming from the company that is working on resolving the Suez blockade to assess the duration’s effect and properly price in the length of the supply disruption.
Working against the Suez blockade boost, US crude stocks built yet again last week, and so did overall oil products including gasoline and distillates/diesel.
When stocks build then prices naturally take a hit, so the inventory buildup scaled back some of the Suez blockade gains.
The concerns about a delayed recovery in demand still persists in the market sentiment as the count of Covid-19 infections from Europe to India start to scare again.
Vaccine protectionism is becoming an increasingly tense debate and markets are concerned about not only the speed of vaccinations and their efficacy, but also about the risk of inflation down the road due to monetary and fiscal stimulus, holding risk appetite down across financial markets.
What is preventing oil prices from dropping much further is the market anticipation that OPEC+ will again act next week to hold supply back when it decides its production targets for May.
The oil market is aware that the Suez incident is a one-off boost and will be resolved sooner or later, likely without any major effect, so focus is again shifting to usual fundamentals, the demand recovery and the stock levels.
In reality the larger issue for energy markets created by the blockade is for LNG deliveries, especially from Qatar, as Suez is its key route to Europe, where LNG demand is not suffering as much as oil.
