Middle Eastern Producers Of Natural Gas And Diesel Have Become Key European Suppliers Since Russia’s Invasion Of Ukraine

Energy prices rallied sharply Monday morning after reports of multiple companies re-routing ships to avoid being attacked in the Red Sea, cutting off Access to one of the 4 busiest shipping lanes in the world. Prices eased in the afternoon however as it appears that the actual impact of those re-routed ships may be less than originally expected, and a new plan was formed to combat the threat. 

Middle Eastern producers of natural gas and diesel in particular have become key European suppliers since Russia’s invasion of Ukraine, and if those shipments have to take the long way around Africa, it will further stretch the global shipping network that’s already been forced to get extremely creative to keep up with demand the past couple of years. Keep in mind that the Suez Canal was seeing increased traffic due to Panama Canal delays, and now that pinch point is facing its own dilemmas. 

Showing just how important this waterway is, the Pentagon quickly announced a naval task force with 10 participating countries (9 of which you’re probably familiar with) to ensure the freedom of navigation – and capitalism – around the Red Sea.   

The fact that Saudi Arabia has been at war with the Houthi’s for the better part of a decade, and this shipping disruption puts Egypt’s largest revenue stream at risk suggests that the Iranian-backed militias are segregating themselves from much of the Arab world, in stark contrast to the war 50 years ago that prompted the Arab oil embargo. Then again, Saudi Arabia hasn’t been doing the US any favors lately and is urging restraint as it tries to disengage from the Yemeni civil war, which may complicate efforts to put an end to the Houthi threat.

Meanwhile, in what may be a different form of asymmetric warfare, or perhaps just a sign of unsafe working conditions, the 2nd Iranian refinery in a week apparently spontaneously caught fire over the weekend.

One small bit of good news, some recent rains in Central America have eased the expected restrictions on shipments through the Panama Canal. Shipments were expected to drop from the mid 30s before the drought to just 18 per day in February, but now are expected to hold at 24. It’s still a big challenge, but it’s 25% less bad.  

LA diesel basis saw a big increase of nearly 15 cents/gallon Monday, following reports of a weekend disruption at the Marathon Wilmington refinery. Gasoline basis in the LA spot market didn’t flinch on the news however, so it seems that the event did not cause a widespread outage at the facility.

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