Red Sea conflict not expected to cause oil price spike

Ongoing conflict in the Red Sea region is acting as a support to commodity prices, but prices shouldn’t spike unless the disruptions intensify, according to Fitch Ratings.

Oil shipments through the Red Sea region accounted for about 12% of global oil seaborne trade in 2023, Fitch noted in a report — with shipments coming to Europe mainly from Saudi Arabia and Iraq, and exports of Russian oil to China and India, comprising most of that traffic.

Several major producers, including BP, Shell and QatarEnergy, and many shippers have stopped sending ships through the Suez Canal, Fitch said, and some ships are being re-routed around Africa.

“This may marginally tighten the oil and gas markets, albeit temporarily, as supply chains need to adjust to the alternative route taking about a fortnight longer, but we do not anticipate any material impact on prices,” it said.

The growth of global oil demand is also expected to moderate in 2024 as the global economy slows and China reduces its oil consumption, the report said.

Additionally, the global oil supply is strong, Fitch noted, adding that the OPEC+ countries have more than five million barrels per day of spare capacity.

“This will cushion any impact from potentially protracted or escalated disruptions,” it said. “Without material disruptions to actual oil production, or a wider escalation of attacks to more vital oil transport routes in the region, we do not expect a strong upside to our US$80/barrel price assumption for 2024, as there is material OPEC+ spare capacity.”

However, disruption spreading to the Strait of Hormuz, which accounts for about 27% of global oil shipping, “would create more tangible repercussions for global oil and gas markets, with more sustained price increases,” it noted.

Other commodities are also impacted by the conflict, Fitch said.

About 8% of the global trade in liquefied natural gas is shipped through the Suez Canal, and about 7% of global potash and 5% of the phosphate rock trade also transits through the region, Fitch noted.

While fertilizer ships haven’t been affected by attacks so far, “shipping costs account for about 10% of fertilizer prices, and therefore rising freight rates will add pressure on profitability.”