Explained: How attacks on Red Sea by Houthis will affect oil and gas shipping?

The Israel-Hamas war will soon enter its third month, and there are fears that this ongoing conflict might spill over to the rest of the Middle East. The Iran-aligned Houthis of Yemen have been playing an escalating role in the war, attacking commercial ships at the southern end of the Red Sea, and also firing missiles at Israel. According to a report by the news agency Reuters on Wednesday (Dec 20), the attacks have raised the spectre of another bout of disruption to international commerce which was previously seen during the Covid pandemic.

A United States-led international force has been dispatched to patrol waters near Yemen. The attacks in the Red Sea have also threatened sea lanes through which much of the world's oil is shipped. Several shipping companies along with some liquefied natural gas (LNG) tankers have decided to avoid the world's main East-West trade route following the attacks.

The significance of the Red Sea

The Red Sea is the only route to the Suez Canal, linking some of the world's biggest consumers of tradable goods in Europe with big suppliers in Asia, areport by The Straits Times on Saturday said. The report added that around 12 per cent of global trade passes through the canal and more than $1 trillion worth of goods per year.

The attacks by Houthis have made reaching the Suez Canal more perilous. Reuters reported on Wednesday that 4-8 per cent of global LNG cargoes passed through the canal this year.

Citing S&P Global Commodity Insights, the report said that in 2023, a total of 16.2 million metric tonnes (MMT), or 51% of LNG trade, has flowed from the Atlantic Basin east through the Suez Canal, while 15.7 MMT went through the canal from the Pacific Basin west.

On the other hand, 8.2 million barrels per day (bpd) of crude oil and oil products traversed the Red Sea over January-November, as per analytics firm Vortexa.

The main shippers through the Red Sea route

The Suez Canal is one of the most important arteries of the global oil trade. Vortexa's head of intelligence and analysis for MENA Jay Maroo told Reuters that the northbound traffic (through the Red Sea route) is dominated by European imports, primarily of crude oil from Middle East producers and also of middle distillates from India and the Middle East.

The southbound traffic comprises crude flows, mainly from Russia to Asian customers, and also refined products naphtha and fuel oil, he added. Three countries - Qatar, the US, and Russia are the most active shippers of LNG via the canal.

Who guards the Red Sea?

Some commercial ships in the Red Sea have armed security who can open fire on approaching vessels if they look hostile. However, the region is also protected by the Combined Maritime Forces- a 39-nation partnership including the navies of the United States, India, Australia, France, the United Kingdom (UK), Saudi Arabia and Yemen.

On Tuesday, US Defense Secretary Lloyd Austin announced the creation of a multinational operation to safeguard commerce in the Red Sea. “The lifeblood of a rules-based international order is actually seawater. All countries have the right to move freely and lawfully in international waters, but that foundational global right is under new threat today from the totally unacceptable attacks on merchant vessels by the Houthis in Yemen,” Austin said.

“So, this morning we’ve launched Operation Prosperity Guardian, under the umbrella of combined maritime forces and under the leadership of taskforce 153. That operation is bringing together more than a dozen countries from around the world to conduct joint patrols in the Red Sea and the Gulf of Aden,” he added.

The Pentagon said on Thursday that more than 20 countries agreed to participate in the coalition. "We've had over 20 nations now sign on to participate. We'll allow other countries, defer to them to talk about their participation," Pentagon Press Secretary Major General Patrick Ryder said.

Have prices been impacted following the attacks?

Reuters reported on Wednesday that Asian spot LNG prices were at $12.3 per million British thermal units (mmBtu) and remained throughout this range since the attacks by Houthis (at the Red Sea) started.

Prices have fallen in recent weeks mounting demand concerns and growing indications that the world will go into the next year in a supply surplus. Tamas Varga of oil broker PVM told the news agency that the recent rise in oil prices was understandable "but the rally will not last unless oil supply is materially affected."

Oil freight prices have already been impacted. According to Vortexa, Rates for booking a Suezmax to transport crude from the Middle East to Europe went up 25 per cent in a week.

A shipping source told Reuters that insurance war risk premiums went up from $2,000 to $10,000.

Meanwhile, crude and oil products market players said the extent of the impact will be determined by the duration of shipping disruptions as a result of the Houthi attacks. LNG market players have said that the gas tradeis likely to be largely unaffected and any disruption would not have a massive impact on global supply.

(With inputs from agencies)