Red Sea Tensions Rise: Navigating the Impacts on Global Shipping and Oil Prices

Since December, Houthi rebels in Yemen have attacked cargo ships passing near the Red Sea, leading several container shipping companies to announce the suspension of routes in the Red Sea region. Following another attack on a cargo ship, Maersk announced on December 31st a further 48-hour suspension of all Red Sea transportation. As the situation in the Red Sea changes once again, the impact has been felt with all contracts for the Container Shipping Index (Europe Line) hitting the upper limit when markets opened on January 2nd.

Let's take a look together at how the situation in the Red Sea is expected to evolve and how it might affect the market.

 Chart: Shipping Sector Trend

To facilitate better understanding, we have organized the timeline of events in the Red Sea:

December 15, 2023: Houthi rebels in Yemen fired missiles at a container ship bound for Israel. On the same day, shipping companies Hapag-Lloyd and Maersk Line announced the suspension of container shipping through the Red Sea route.

December 18, 2023: US Secretary of Defense Lloyd Austin announced joint patrols in the southern Red Sea and the Gulf of Aden to protect transiting merchant ships.

December 20, 2023: By the 20th of December, major shipping companies including Maersk, Hapag-Lloyd, MSC, CMA CGM, and Evergreen announced the suspension of the Red Sea-Suez Canal route, taking the detour around the Cape of Good Hope, with at least 13 shipping companies having announced detour plans.

December 24, 2023: Under the US-led escort operation, Maersk announced the resumption of passage through the Red Sea.

December 31, 2023: A Maersk container ship was attacked again by Houthi rebels. Maersk announced a 48-hour suspension of all Red Sea transportation.

January 1, 2024: The Iranian destroyer "Alborz" passed through the Strait of Mandeb into the Red Sea.

January 2, 2024: Maersk announces an extension of the suspension of its Red Sea route; Hapag-Lloyd will continue to avoid the Red Sea, sailing around the Cape of Good Hope until January 9th, after which the situation will be reassessed.

Furthermore, according to information released by the Houthi rebels, the official strength of the Houthi armed forces is as high as 870,000 personnel, including 770,000 in the army, as well as possessing about 2,800 main battle tanks, 1,844 self-propelled guns, and 4,856 armored vehicles. The armed group's comprehensive strength is considerable.

The Suez-Red Sea-Mandeb Strait, serving as a transportation fortress connecting Europe, Asia, and Africa, is one of the world's busiest shipping lanes. As we can see from the map, the Mandeb Strait, controlled by the Houthi rebels in Yemen, is located at the southern end of the Red Sea and is a strategic passage for ships traveling through the Red Sea route, holding a position of great importance.

 Chart: Changes in shipping routes affected by the Israeli-Palestinian conflict

The Red Sea route is one of the world's most important trade routes, with significant impacts on container and oil shipping. According to Clarkson's data, in 2023, the cargo volume of ships passing through the Suez Canal accounted for 37% of the global container shipping volume, 22% of LPG carrier volume, 14% of refined oil carrier volume, 11% of crude oil tanker volume, while accounting for less than 4% of the global dry bulk shipping volume.

After the suspension of the Red Sea route, shipping companies can only opt to reroute around the Cape of Good Hope, which will noticeably increase the distance and sailing days of related routes and delay deliveries. According to estimates by S&P Global Platts, the voyage from Rotterdam, Netherlands, to Singapore for cargo ships via the Cape of Good Hope is 40% longer than the original route through the Suez Canal.

Consequently, as container shipping giants avoid the Red Sea route, reduced transportation efficiency and increased costs will directly lead to higher container shipping rates. Since the Red Sea route has the most significant impact on the Asia-Europe and Asia-Mediterranean routes, the European market is most affected by the rise in shipping prices. As of January 1st, the Shanghai Containerized Freight Index (SCFI) has increased by 24% compared to December 1st, with the Shanghai to Europe/Mediterranean routes surging by 217%/177%.

If oil tankers also reroute around the Cape of Good Hope, the cost of oil transportation will be affected by the increased distance. As of January 1st, the crude oil BDTI (Baltic Dirty Tanker Index) and refined oil BCTI (Baltic Clean Tanker Index) freight indices have respectively increased by 2% and 15% compared to December 1st.

Short-term fluctuations in oil prices are driven by changes in the Red Sea situation. The WTI crude oil futures price has gradually climbed since the escalation of the Red Sea incident in mid-December. Oil prices dropped significantly after Maersk announced the resumption of Red Sea shipping, but experienced a slight rise again following Maersk's announcement of a further suspension.

However, in the long term, the impact of the Red Sea suspension on oil prices is relatively limited. On one hand, the proportion of oil transportation through the Suez Canal is not very high. Also, the cost of oil transportation is a lower component of the total cost of crude oil, usually representing only 1.5%-4.5% of the crude oil import price under normal circumstances. Moreover, oil prices are mainly affected by changes in supply and demand dynamics, with production and demand being the key variables.

 Chart: Crude Oil Futures Trend

The current situation in the Middle East remains very complex, and it is still necessary to closely monitor the developments of the Red Sea route incident. At present, the US military has been involved in direct conflict with Houthi armed forces while escorting Maersk container ships, resulting in casualties. It is expected that the UK and the US will issue a joint statement to the Houthi militants in Yemen as a final ultimatum. Meanwhile, the Iranian military, which has traditionally supported the Houthis in Yemen, dispatched the Iranian destroyer "Alborz" through the Strait of Mandeb into the Red Sea on January 1st local time.