Europe (Washington Insider Magazine)—The structure of the global benchmark Brent crude futures market and some physical oil markets in Europe and Africa are reflecting a tightening supply. This is partly due to concerns over shipping delays as vessels avoid the Red Sea following missile and drone attacks by Houthi rebels in Yemen. These disruptions, the largest to global trade since the COVID-19 pandemic, have combined with other factors like rising Chinese demand, creating increased competition for crude supplies that don’t need to transit the Suez Canal. Analysts have noted that these effects are most apparent in European markets.
In a sign of tighter supply, the Brent crude market structure – which is used to price nearly 80% of the world’s traded oil – hit its most bullish in two months. This occurred as tankers diverted from the Red Sea following recent air strikes by the United States and the United Kingdom on targets in Yemen. Brent’s first-month contract premium to the six-month contract rose to $2.15 a barrel on Friday, the highest since early November. This backwardation structure, where prompt delivery contracts are priced higher than future contracts, indicates a perception of tighter supply for immediate delivery.
Houthi rebels, who control northern Yemen and the country’s western coastline, have launched a wave of assaults on ships in the Red Sea in response to Israel’s ongoing war in Gaza. Their attacks have targeted vessels they perceive as linked to Israel, in an attempt to pressure Tel Aviv to halt the war and allow humanitarian aid into the Gaza Strip. Houthi activity has focused on the Bab al-Mandeb strait, a critical chokepoint that connects the Gulf of Aden to the Red Sea. Around 50 ships pass through the strait daily, bound for or leaving the Suez Canal, a key artery for global trade.
Some of the world’s largest shipping companies have suspended transit through the Red Sea, forcing vessels to take the longer route around the Cape of Good Hope in southern Africa. This diversion has driven up freight rates due to the increased costs of fuel, crew, and insurance. According to Viktor Katona, lead crude analyst at Kpler, “Brent is the most impacted futures contract when it comes to Red Sea/Suez Canal disruptions. European refiners are undoubtedly suffering the most on the physical front.”
Less Middle Eastern crude is flowing into Europe, with shipments nearly halved from 1.07 million barrels per day (bpd) in October to approximately 570,000 bpd in December, according to Kpler data. Ships traversing the Suez Canal have taken on greater importance since the war in Ukraine. Sanctions on Russia have forced Europe to rely more heavily on oil from the Middle East, which supplies about one-third of the world’s Brent crude. However, the impact of Red Sea shipping disruptions is difficult to isolate, as the crude market remains tight across the board. “It’s a strong market everywhere, but people are very nervous,” a crude trader told Reuters.
The European crude market has also tightened due to a drop in Libyan oil production following protests, the first disruption in months, and lower exports from Nigeria. Angolan crude, which typically heads to Europe without passing through the Suez Canal, is now in higher demand from China and India. This shift in demand is due to issues with Iranian and Russian crude, further reducing the availability of oil for European buyers.
China, the world’s largest oil importer, is facing challenges with its oil trade with Iran. Tehran has been withholding shipments, demanding higher prices, while India’s imports of Russian crude have declined due to currency issues, though India has also pointed to uncompetitive prices. Meanwhile, China has continued to import record amounts of discounted Russian oil despite Western sanctions imposed over Moscow’s invasion of Ukraine in 2022. Russian crude shipments to China hit a record high in 2023, with 107.02 million metric tonnes, equivalent to 2.14 million bpd, surpassing Saudi Arabia to become China’s top supplier.
Saudi Arabia, previously China’s largest oil supplier, saw its exports to the Asian giant fall by 1.8%, to 85.96 million tonnes. This decrease reflects a loss in market share to cheaper Russian crude. The shifting dynamics in the global oil market underscore the complexity of supply and demand, as geopolitical tensions in the Red Sea, sanctions on Russia, and rising demand from Asia all combine to tighten available crude supplies, particularly for European refiners.
