After an increasing number of attacks by Houthi rebels on ships transiting the Red Sea/Suez Canal route, several liner companies announced plans last week to suspend voyages on this route. Now we have BP announcing a similar suspension of tanker transits through the Suez Canal. If more tanker operators follow BP’s lead, we could see a significant jump in tanker tonne-mile demand and tanker freight rates.
Over the past 18 months, we estimate that more than 10% of oil trade volumes have passed through the Red Sea. This is split between westbound volumes, via both the Suez Canal and the Sumed Pipeline, destined for both Europe and North America. Together these volumes are estimated at close to 2.5 mbd, consisting of both crude and products from the Middle East, as well as product shipments from India. In addition, eastbound volumes from Russia to Asia, which were relatively small prior to the Russia-Ukraine War, have jumped since mid-2022 due to the shift in trading patterns seen in response to Europe’s ban on Russian oil. These eastbound volumes are estimated to be close to 3 mbd.
So, more than 5 mbd could potentially be diverted away from the Red Sea to the Cape of Good Hope route instead, with such cargoes having to travel an extra 6-7,000 nautical miles. We estimate that for every 1 mbd of volumes diverted away from the Red Sea, the tanker fleet utilization would rise by about 1%. The first such rise in utilization would push tanker rates up by $10k-$20k/day (compared to where rates would be without any diversions), with Suezmax and Aframax rates likely to see the largest gains.
Although we think diversions in excess of 1 mbd are unlikely, each additional 1 mbd of diversions would result in an even larger jump in freight rates, as the market becomes more sensitive to changes as fleet utilization becomes tighter. If roughly half of oil cargoes ended up being diverted away from the Red Sea to the Cape of Good Hope we would expect rates to increase by close to $50,000 per day, lifting Suezmax and Aframax rates to $100,000 per day.