Oil Supply Tightens in Europe over Yemeni Houthi Disruptions in Red Sea

The structure of the global benchmark Brent crude futures market and some physical markets in Europe and Africa have been reflecting tighter supply partly over concerns about shipping delays as vessels avoid the Red Sea due to missile and drone attacks. The disruptions – which have been the largest to global trade since the COVID-19 pandemic – have combined with other factors such as rising Chinese demand to increase competition for crude supply that does not have to transit the Suez Canal, and analysts say this is most evident in European markets. In a sign of tighter supply, the market structure of Brent – which is used to price nearly 80% of the world’s traded oil – hit its most bullish in two months on Friday, as tankers diverted from the Red Sea following recent air strikes by the United States and United Kingdom on targets in Yemen. In response to Israel’s war on Gaza, rebels from the group that controls northern Yemen and its western coastline have launched a wave of assaults on ships in the Red Sea.

By targeting vessels with perceived links to Israel, the Houthis are attempting to force Tel Aviv to stop the war and allow humanitarian aid into the Gaza Strip. Houthi activity has so far been concentrated in the narrow strait of Bab al-Mandeb, which connects the Gulf of Aden to the Red Sea. Approximately 50 ships sail through the strait every day, heading to and from the Suez Canal – a central artery for global trade. Some of the world’s largest shipping companies have suspended transit in the region, forcing vessels to sail around the Cape of Good Hope in Southern Africa. The lengthier route has raised freight rates due to higher fuel, crew and insurance costs. “Brent is the most impacted futures contract when it comes to Red Sea/Suez Canal disruptions,” Viktor Katona, lead crude analyst at Kpler, told the Reuters news agency. “So who suffers the most on the physical front? Undoubtedly, it is European refiners.” The premium of the first-month Brent contract to the six-month contract LCOc1-LCOc7 rose to as much as US$2.15 a barrel on Friday, the highest since early November. This structure, called backwardation, indicates a perception of tighter supply for prompt delivery.