Oil price ‘reprieve’ caused by blockage is likely to be temporary, analyst says

Oil prices rose during early trading yesterday in response to the blockage of the Suez Canal, a vital passageway for trade in crude and commodities.

Brent, the international benchmark under which two thirds of the world’s crude is traded, was up 3.26 per cent to trade at $62.77 per barrel at 6pm UAE time.

West Texas Intermediate, which tracks US crude grades, was up 3.36 per cent at $59.20 per barrel.

The potential disruption to crude spiked oil contracts by 1 per cent, said Jeffrey Halley, senior market analyst at Asia Pacific at Oanda.

A million barrels of crude are shipped through the Suez Canal each day.

About 12 per cent of the world’s trade passes through the 193-kilometre waterway.

The Suez Canal and the Sumed Pipeline are critical chokepoints for Middle Eastern

crude, which accounts for nearly 30 per cent of all supply.

In 2019, the canal and the pipeline accounted for nearly 9 per cent of all seaborne-traded crude and petroleum products, according to the US Energy Information Administration.

Congestion caused by the Ever Given blocking the canal will interrupt the smooth passage of oil.

Saudi Arabia, the world’s largest crude exporter, ships 500,000 bpd of crude to the US alone. A significant portion of this travels through the canal.

A 2018 blockade at Bab Al Mandeb, a strait that lies further to the south of the Arabian Peninsula, near Yemeni territorial waters, also caused concerns about the security of oil supply.

The disruption to Suez traffic has lifted prices, which had suffered a sell-off last week over renewed concern about Covid-19 infections.

The sell-off continued on Tuesday, with Brent and WTI collapsing by a further 6 per cent.

Falling crude demand in Europe, where vaccination has suffered setbacks, weighed on sentiment.

The blockage has provided a “reprieve” to oil prices, but this is likely to be only temporary, Mr Halley said.

“With speculative markets still long, it seems oil is likely to be a sell ... until Covid-19 and economic recovery sentiment swings back into the black,” Mr Halley said.

A slow vaccine programme is likely to delay a recovery in oil demand, with an expected 5.5 million bpd increase likely only if there is a strong pick-up in the second half of the year, Saxo Bank’s head of commodity strategy Ole Hansen said.

However, “the long overdue and much needed” recent correction in prices is now close to having exhausted itself, Mr Hansen said.