EIA: Shipping Times and Rates Affected by Red Sea Dangers

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Written by Paul Wiseman for Industrial Info Resources (Sugar Land, Texas)--At the southwest corner of the Arabian Peninsula, the southern end of the Red Sea comes to a point at the Bab el-Mandeb Strait between Yemen on the Arabian side and the tiny nation of Djibouti on Africa's east coast. On the north end of the Red Sea is the Suez Canal.

About 12% of the world's seaborne oil trade and 8% of the world's liquefied natural gas (LNG) transport pass through that chokepoint, according to the U.S. Energy Information Administration (EIA). Since November 2023, that's become a problem, as the Yemen-based Houthi militia began attacking commercial ships at that time.

There were several issues for shippers as a result: tankers began taking longer routes to take oil from Arabian Sea ports to the U.S and to Europe; for ships still traversing the Bab el-Mandeb Strait, insurance rates skyrocketed along with the risks. In both cases, shipping costs increased, says the EIA.

Take the Long Way Home
Among the companies avoiding the Strait are Equinor (NYSE:EQNR) (Stavanger, Norway), BP (NYSE:BP) (London, England), Euronav (NYSE:EURN) (Antwerp, Belgium), QatarEnergy (Doha, Qatar), Torm (Copenhagen, Denmark), Shell plc (NYSE:SHEL) (London, England) and Reliance (Mumbai, India).

To get from the Persian Gulf to the Amsterdam-Rotterdam-Antwerp trading hub (ARA) through the Suez Canal, it typically takes about 19 days. Avoiding that route involves going south around the Cape of Good Hope, stretching the trip to 35 days, the EIA reports.

Shippers face further complications in the West, due to weather. U.S. exports from the Gulf Coast to Asia usually traverse the Panama Canal, which in normal years takes about a month. But that passage is slowed by an ongoing drought, so many of the Very Large Gas Carriers (VLGCs), carrying mostly propane and butane, had shifted to the Suez Canal. But now they've further shifted routes to the Cape of Good Hope. Going through the Suez had added 17 days to the trip, and now circumnavigating south of Africa to Japan's Chiba port adds 21 days compared to the Panama Canal route, an additional four compared to the Suez route.

By the Numbers
Here is how droughts and dangers are affecting traffic patterns. The Panama situation contributed to increasing liquefied petroleum gas (LPG) flows through Bab el-Mandeb by 59% in 2023 compared with the previous year. But passages through the latter are likely to drop for January of this year, as The Combined Maritime Forces, a partnership representing 39 nations, issued a January 12 warning for ships to avoid the strait.

Flows of oil, refined products, and natural gas across the Red Sea began dropping shortly after the attacks began, says the EIA. Crude shipments fell by around 18% in December compared to the average of 2023's first 11 months. And clean petroleum product shipments were 30% lower in December compared with the previous 11 months. The EIA noted, "The majority of petroleum product trade leaves Saudi Arabia and India bound for Europe and leaves Russia bound for Asia."

What Price Safety?
It will be no surprise that these longer routes burn more fuel and tie up ships and crews for longer periods. Says the EIA, "Longer routes put upward pressure on freight rates because of fuel costs and fewer available ships. A VLGC, for example, consumes about $30,000 to $35,000 worth of fuel per day if using high-sulfur bunker fuel at average 2023 prices. In addition to adding to fuel costs, a longer voyage requires more ships to maintain the same delivery schedule, and fewer available ships contribute to higher tanker rates and costs." These costs are passed on to customers.

Those that save those costs by continuing to risk Bab el-Mandeb incur different cost escalations, in higher insurance rates. The EIA story says those costs have risen by an average of 20% since the attacks began--costs that, like fuel increases, are passed on down the chain of possession.

How this may affect the prices and stockpiles of oil and refined products remains to be seen, and may largely depend on how long the Houthis continue to attack shipping lanes.

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