The Impact of Red Sea Crisis on Global Energy Markets

The Red Sea Crisis

In recent weeks, the closure of one of the world's most important trade routes has caused significant disruptions in global energy markets. Tankers of oil and liquefied natural gas (LNG) have been forced to take longer routes to their destinations, leading to concerns about energy prices and supply. However, despite the crisis in the Red Sea, energy prices have barely reacted, and in some cases, have even declined over the past few weeks.

The closure of the Red Sea trade route has raised questions about the resilience of global energy markets and the factors that are influencing energy prices amidst the crisis.

Factors Affecting Energy Prices

The recent tensions in the Red Sea, including attacks on shipping and geopolitical unrest, have not led to the expected surge in energy prices. Europe, which imports most of its natural gas, has seen a 28% decrease in the price of the benchmark gas contract since early December. Additionally, the prices of Brent crude and West Texas Intermediate have barely moved, indicating a surprising stability in energy prices despite the crisis.

Analysts attribute this stability to economic factors such as weaker demand in countries like China and Germany, as well as ample oil and gas supply. The current market sentiment suggests that these economic factors are overshadowing concerns about violence in the Middle East, at least for the time being.

Global Oil and Gas Supply

Despite the disruptions in the Red Sea trade route, global oil supply remains robust, while the growth in demand for oil is weakening. China's economic growth, although beating government projections, is still one of the country's worst performances in over three decades. This has contributed to a slowdown in global oil demand growth, which is expected to almost halve this year. On the supply side, global oil supply is forecast to reach an all-time high, driven by record output from countries like the United States and Canada.

The Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, have announced cuts to output in an attempt to buoy prices. However, the International Energy Agency has warned of a potential 'substantial surplus' of oil globally if the OPEC+ alliance unwinds some of those cuts during the second quarter.