Crude and gas pop on Red Sea disruption risk Crude and gas pop on Red Sea disruption risk Crude and gas pop on Red Sea disruption risk

Crude and gas pop on Red Sea disruption risk

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  Crude oil and European gas prices received a boost on Monday after several companies, including BP and Equinor, joined a growing list of shippers who have paused Red Sea shipping amid almost daily attacks from Iran-backed Houthi rebels. While this event will line the pockets of shippers given the prospect for longer journeys and higher rates, the impact on crude oil and gas seems temporary unless the Iran link receives some fresh attention, thereby raising fresh concerns about supply from key producers in the Middle East


Key points

  • Crude oil and EU gas prices rose on Monday as shippers avoid the Red Sea route to Europe
  • Longer journeys and higher freight prices will benefit shippers of container, crude and fuel products
  • Recent short selling supporting a non-fundamental driven bounce in crude oil
 

Crude oil and European gas prices received a boost on Monday after several companies, including BP and Equinor, joined a growing list of shippers who have paused Red Sea shipping amid almost daily attacks from Iran-backed Houthi rebels. Developments that led London’s marine insurance market to widen the area in the Red Sea it considers high risk, further reducing the passage of ships on the shortest route to Europe from the Middle East and Asia via the Suez Canal. 

This being the latest disruption related to the Israel-Hamas war with the Houthi attacks being carried out in support of Hamas, and while it may raise short-term supply risks as ships have to sail around Africa, which will add thousands of miles to their voyages, thereby delaying cargo deliveries, the risk of a lasting impact seems limited at this stage. Also considering the US defence Secretary Austin has announced plans to setup a new maritime task force intended to protect commercial vessels from attacks. An announcement that helped arrest Monday’s rally with some weakness seen today, especially in gas.

The longer journeys will require a bigger number of ships and with freight rates potentially rising as a result, shipowners stand to gain the most from this disruption. Since the news broke on Friday, a global shipping index which tracks the performance of stocks from companies engaged in the water transportation business has jumped 10%. An example being Denmark’s Maersk, one of the world’s biggest owners of container vessels jumped 18%, having been under pressure recently from a global economic slowdown and rising capacity. As of yesterday, some 46 container ships have diverted around the Cape of Good Hope rather than transiting the Red Sea, while another 78 container ships are delayed and waiting further orders before transiting (Source: @typesfast on X). 

EU gas remains rangebound with weather the biggest risk

Back to the energy sector which saw the European TTF benchmark gas contract surge by as much as 13% on Monday before reversing lower today. The Suez Canal has emerged as the main route for global LNG trade over the past two years as Europe seeks replacements in the Middle East for pipelined gas from Russia. However, while the closure highlights Europe’s increased reliance on super-chilled gas the outlook for demand this winter stays manageable amid elevated levels of gas in storage, a mild start to the winter and weak industrial demand all weighing on prices. With that in mind spot prices are likely to remain stuck above €30 per MWh with focus on weather developments the main catalyst for a break in either direction. 

Crude oil receives a boost from wrong-footed funds

Brent and WTI both in steep declines since late September received a boost from the news BP and Equinor as well as other shippers of crude and fuel products would halt shipments through the Red Sea. Thereby supporting a bounce that started last week when the Fed’s pivot towards lower rates supported a general recovery in risk appetite. Just like gas we expect the disruption to this major trading route to be short term and as long production is not affected the price impact is likely to be short lived. 

However, given the involvement of Iran-backed Houthi rebels the risk of escalating tensions cannot be ruled out and together with very weak positioning by funds ahead of 2024 these two developments may signal a fresh low has been set up. In Brent within an arear around $72 that has given support on several occasions since March, raising speculation it could be an invisible line in the sand that OPEC+ producers may try to defend. 

As we highlighted in our latest Commitment of Traders update, speculators such as hedge funds and CTAs (commodity trading advisors) cut their net long in WTI and Brent to a 12-year low in the week leading up to last week’s FOMC supported bounce. The selling that took place during the week to December 12 was carried out at volume-weighted average prices (VWAP) below current levels in both WTI and Brent and it highlights the involvement of short covering, potentially telling us the bounce was mostly driven by a technical, more than a fundamental change. The slump to 171k contracts (171 million barrels) from a September peak at 560k contracts, shows what a combination of weakening fundamentals and negative momentum can to do prices and positioning among speculators. 

Do note that this group of traders tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market. Given the current weak positioning it will not take much in terms of a change to support a bounce, but with trading activity increasingly closing ahead of Christmas and New Year, the prospect of further gains will depend on the economic outlook into the early months of 2024, and whether OPEC+ will continue to be active managers of supply. 

Technical update from Kim Cramer, Saxo’s technical analyst, on Brent and WTI 

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.