The gigantic cargo ship that is stuck in the Suez Canal and blocking traffic at one of the most important choke points for sea trade in the world is not yet ready to break free.
The Ever Given, a 220,000-ton mega-ship with a capacity of almost a quarter mile and a capacity of 20,000 containers, ran aground after being blown by strong winds as it entered Egypt’s Suez Canal from the Red Sea. The passage, which is home to up to 12% of the world’s maritime trade and through which 50 container ships normally pass per day, is completely blocked.
Tugs and dredgers are currently working on removing the ship, which has been stalled since Tuesday evening. But the operation could take weeks, one of the executives involved warned.
“Although we believe and hope that the situation will improve shortly, there is a risk that the ship will break,” JPMorgan strategist Marko Kolanovic wrote in a note on Thursday. “In this scenario, the channel would be blocked for an extended period of time, which could lead to significant disruptions in world trade, skyrocketing shipping rates, a further surge in energy resources and an increase in global inflation.”
The stranded container ship Ever Given, one of the largest container ships in the world, was seen aground in Egypt’s Suez Canal on March 25, 2021.
Suez Canal Authority | Reuters
The crisis is another blow to the global supply chain after a brutal year of delays, bottlenecks and price pressures due to the coronavirus pandemic.
What does this mean for world trade?
The shipping delays can affect everything from clothes and shoes you ordered online to fitness equipment, electronics, groceries, and power supplies – which means gas prices could go up too.
“The blocking of containers in the Suez Canal to further shake global supply chains and raise prices in the face of pent-up demand,” said JPMorgan analysts in a research report on Thursday.
The artificial Suez is 120 miles long and an important transit point between east and west. And the 20,000 ships that pass annually transport everything from oil and gas to machine parts and consumer goods.
While it is still early to say how the full impact of the tanker crisis will play out, the bank anticipates that in the near future, the blockade will likely add to the supply strains in the industry, already caused by ongoing supply chain bottlenecks the form of congestion in the port and the lack of ships and containers due to Covid-19 are hindered.
Ships have to divert to completely different routes, “which will lead to longer journey times and further delays,” wrote JPMorgan.
And those delays could be more than 15 days for many ships, the alternative of which is to circumnavigate the Cape of Good Hope on the southern tip of Africa, which analysts say would increase shipping times by up to 30%.
“The immediate effects of delays in the canal will focus on Euro-Asian trade, delaying the already disrupted supply chains affecting the supply of oil and refined products,” ING senior economist Joanna Konings wrote in a Wednesday Customer notification.
Effects on Crude Oil Prices
The Ever Given disaster is already having an impact on oil prices.
The news of the Suez Blockade attracted buyers and, along with other economic data, helped the one-month futures contract on the international benchmark Brent Crude Oil “posted its largest one-day gain in nearly a year,” according to Arctic Securities on Wednesday $ 64.41 closed “although it lost some of those gains through Thursday.
Meanwhile, between 5% and 10% of all marine oil is transported through the Suez, which means that for every day the ship gets stuck, another 3 to 5 million barrels of oil per day will be delayed. Several tankers carrying jet fuel and gas oil are also being held up on the route between the Persian Gulf and Europe, as well as empty tankers crossing to pick up North Sea oil, S & P Platts reported on Thursday.
A graphic that halts shipping around the Suez Canal after the Ever Given ship got stuck in the canal.
Source: MarineTraffic
The canal is also a transit point for around 8% of the world’s liquefied natural gas (LNG), and a prolonged interruption could disrupt flows mainly to the European market.
Any price effect is likely to be brief, however, says Peter Sutherland, president of Houston-based energy investment firm Henrietta Resources LLC.
“It won’t have a lasting impact on prices, but it will help provide support in the run-up to the OPEC + meeting,” Sutherland told CNBC.
“The risk premium in the oil markets will likely be short-lived, but channel support has still managed to change the market narrative.”
The winners
The canal blockade is certainly not bad news for everyone – the spot freight rates will continue to rise due to the pent-up demand and make money for the operators, say market observers.
“A prolonged closure of the Suez Canal would see container shipping as the greatest beneficiary, while tankers, dry matter and air freight may also have higher rates,” wrote JPMorgan, describing the tightening of shipping rates as an “upside risk”.
Satellite images of the container ship Ever Given are stuck in the Egyptian Suez Canal.
Source: European Space Agency’s Sentinel-2 Satellite
Who will benefit most from it? JP Morgan highlights Asian liners, saying they expect higher spot freight rates despite higher bunker costs due to longer rerouted trips and increasing congestion. “In our view, it is expected that this will have a positive impact on the bottom line of the Asian lines rather than hurting profitability,” the bank wrote.
Bank of America analysts agree. “A Suez closure of a few weeks would be very positive for spot freight rates – by effectively reducing supply by increasing the sailing distance over the Cape of Good Hope by 20-30%,” she wrote in her note on Thursday.
Risks and weak points grow
Meanwhile, the Suez Canal blockade will “add to an already rising risk premium for oil and refined products in the Middle East,” said Torbjorn Soltvedt, chief MENA analyst at Verisk Maplecroft, highlighting the increased risk of oil rig attacks amid regional tensions emerged.
The uncertainty about the length of the blockade “creates a window of opportunity for state and non-state actors to try to maximize the impact of attacks on tankers and energy infrastructure in the Persian Gulf and Red Sea,” he warned.
Cargo ship “Ever Given” is stuck and blocking traffic in the Suez Canal
Source: Reuters
Most analysts expect the situation to improve within the week. “However, the disorder could be prolonged if complications or torso damage occurs,” Bank of America wrote on Thursday. If the traffic is cleared at some point, the ships arrive at their ports behind schedule, causing further congestion.
Nevertheless, the bank writes: “A blockade of a few days would be largely manageable for container shipping – possibly associated with additional fuel costs, as the shipping companies accelerate their services to make up for lost time.”
The whole fiasco underscores the fragility of the trading network that the world really relies on, Sutherland says.
“Coupled with the recent attacks on Saudi assets, it is a reminder of the many vulnerabilities in the global oil and gas supply chain.”