Red Sea turmoil sparks concerns for oil importing nations despite supply stability: S&P GCI

New Delhi [India], February 7 : A recent string of attacks on shipping routes in the Red Sea has left oil importing countries on edge, despite oil supplies remaining relatively stable amidst the turmoil.
According to S&P Global Commodity Insights (GCI), while oil shipments have largely been spared from major disruptions, concerns loom over potential escalations that could significantly impact the situation, leading to disruptions in global supply chains.
Although the attacks primarily targeted container shipping lines, the stability of oil shipments is under scrutiny.
The need for supply chains to swiftly adjust in the face of continued disruption poses a significant challenge, as existing oil tanker contracts are difficult to alter.
Moreover, rerouting oil shipments to avoid the affected areas is expected to increase voyage costs, with new insurance for Red Sea routes potentially adding up to USD 1 per barrel or more.
The recent attacks by Yemen's Houthi militants have prompted many shippers, tanker owners, and oil companies to suspend voyages through the Red Sea and Bab al-Mandab strait, threatening a vital chokepoint for global seaborne trade.
Russia's oil exports, in particular, are vulnerable to further disruptions, as the country ships around 80 per cent of its crude to Asian markets, raising concerns about potential supply constraints.
While the rerouting of tankers away from the Red Sea may lead to increased shipping costs, the impact is expected to be temporary.
Nonetheless, the longer routes via the Cape of Good Hope will result in higher shipping costs, longer voyage durations, and increased fuel costs, ultimately tightening supplies and driving up freight rates.
Despite the challenges posed by the Red Sea crisis, Asia, the largest oil importing region, may not experience significant disruptions to near-term oil supplies.
However, refiners are preparing alternative plans to ensure steady feedstock flows in the event of an escalation, potentially inflating insurance costs and affecting refining margins.
Asian oil buyers are closely monitoring the situation, particularly with regards to Middle Eastern sour crude supplies.
While major sellers like Saudi Aramco and Abu Dhabi National Oil Co. continue to fulfill Asian customers' demand, the economics of cracking Middle Eastern sour crude have been deteriorating due to rising costs associated with transportation and tanker insurance.
Overall, the geopolitical tensions in the Middle East have heightened concerns, although oil markets have largely remained resilient.
However, the risk of a wider escalation remains, with the alignment between Saudi Arabia and Russia on Organization of the Petroleum Exporting Countries (OPEC+) policy critical for oil markets in 2024.
Despite the current challenges, S&P Global forecasts a gradual improvement in fundamentals in the second half of 2024, with prices expected to rise.
However, a sharper economic slowdown or disagreements within OPEC+ could pose significant risks to oil markets moving forward.