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Sparks

What Red Sea Airstrikes Are Doing to Energy Markets

Traders aren’t ruffled — yet.

The Suez Canal.
Heatmap Illustration/Getty Images

Almost a third of global container traffic goes through the Suez Canal, and around 8% of the world’s oil and gas. Because of its pivotal location between the Indian Ocean and the Mediterranean, the Suez Canal — and thus the Red Sea, which feeds into the canal — connects the huge flow of goods and commodities from the Middle East and Asia to Europe.

On Thursday, conflict in the Red Sea and its surrounding waterways reached a new pitch, with United States and allied forces striking several targets in Yemen as a response to weeks of attacks on shipping and naval assets in the area. The Houthis, a rebel group backed by Iran that controls large portions of the country, including the capital, have justified their attack as a response to Israeli strikes in the Gaza Strip.

So far, according to market researcher Rory Johnston, author of the Commodity Context newsletter, the effect on the global oil market has been muted.

Some oil tankers rerouted away from the Red Sea, according to Reuters; of the roughly 2,000 ships diverted in total, Johnston said, “only a few dozen have been tankers,” although that number rose Friday morning. While oil prices jumped around 3% early Friday, they have since gone roughly flat on the day. So far, missiles from Yemen “had a narrow miss” with a Russian oil tanker in the Gulf of Aden, Bloomberg reported.

“This’ll be the test, but I don’t yet have any reason to believe that it will be a material factor for oil markets,” Johnston told me. “[The] ultimate question will be how the Houthis respond.”

The Houthi attacks have been going on for months, but the major energy producers in the Middle East have yet to curtail their production and exports, Eurasia analyst Greg Brew told me.

“Overall, the crisis in the Red Sea represents a disruption risk to oil and gas, but not a threat to supply,” Brew said. “Tankers have alternate routes, and while a diversion of oil and gas shipments on par with the container ship diversion would add premiums to oil and gas prices and might bring slight inventory draws in consumer markets, they’re unlikely to seriously upset energy flows.”

It’s not just fossil fuels that are affected by turmoil in the Red Sea. Tesla’s Berlin plant will pause production for two weeks because of delays in getting parts. Citing both the plant delays and Hertz’s decision to sell off tens of thousands of Teslas from its rental fleet, Morgan Stanley analysts declared in a note to clients “EV Momentum Hits the Skids.”

The alternative route from the Middle East to Europe runs around the Cape of Good Hope, an added distance of around 6,000 miles and two extra weeks of shipping time. If more ships are forced to detour around Africa, that doesn’t just mean higher costs and longer waits, it also means more emissions. Shipping accounts for about 3% of global greenhouse gas emissions, a figure that could rise if global supply chains become less efficient.

The Suez Canal is not the only global shipping chokepoint under pressure. The Panama Canal — through which about 6% of global trade flows — has had to reduce the number of ships it allows through due to an ongoing drought that has lowered levels in the artificial waterway that feeds the canal system. Last year was the “second driest year in recorded history of the Panama Canal Watershed,” according to the Panama Canal Authority, with the driest October on record.

The Authority announced recently that it would up the number of ships allowed through every day from 22 to 24, although typically in January, 36 ships would be able go to go through.

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Matthew Zeitlin profile image

Matthew Zeitlin

Matthew is a correspondent at Heatmap. Previously he was an economics reporter at Grid, where he covered macroeconomics and energy, and a business reporter at BuzzFeed News, where he covered finance. He has written for The New York Times, the Guardian, Barron's, and New York Magazine.

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