Could the Suez Canal blockage to lead to a rise in oil prices and shipping costs?

Currencies Direct March 25th 2021 - 2 minute read

The Suez Canal is currently suffering from major gridlock after a massive container ship ran aground in the 120-mile man made waterway, blocking traffic in both directions and stranding roughly 100 vessels.

The MV Ever Given, one of the world’s largest container ships, roughly the length of the Empire State Building, is said to have been hit by strong winds which caused it to become lodged sideways across the Canal on Tuesday.

In a statement, Taiwan-based Evergreen Marine, which operates the vessel, said:

‘At about six nautical miles from the canal’s southern end, the ship is suspected to have met with a sudden gust of strong wind, which caused the ship’s body to veer from its course and accidentally run aground.’

The blockage of the route through Egypt has highlighted the Suez Canal’s vital role in our globalised economy. As one of the world’s busiest waterways, with an estimated 19,000 ships passing through it in 2020, or roughly 51 a day, even a temporary closure of the Suez Canal could have major ramifications for global trade.

Samir Madani, Co-Founder at TankerTrackers.com, an independent service which tracks crude oil shipments, commented:

‘The canal is a key chokepoint for global trade. If they can free the vessel quickly then the impact will be minimised but any prolonged blockage would have severe consequences, from affecting oil prices and shipping rates to forcing container vessels to take the much longer route around Africa.’
 

What is the knock-on effect of the blockage?

Shipping companies will be hoping for a swift resolution to the crisis as the alternative route around Africa could add anywhere up to 20 days to a journey for container ships, which would not only lead to delays but greatly increase fuel costs for the industry.

This of course would lead to even higher shipping costs at a time when container contracts are already near record highs due to the disruption caused by the coronavirus pandemic.

The blockage has already been reflected in higher oil prices in the aftermath, with the Brent Crude benchmark having climbed roughly 3% on the day as of writing, reversing a slump from earlier in the week as Europe's coronavirus resurgence dampened forecasts for demand in 2021.

Egypt has reopened the Suez Canal’s older channel to divert some traffic, and there are reports that the Ever Given has been partially refloated, but some experts warn it could take days for the backlog to be fully cleared.
 

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Currencies Direct

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