What does Suez Canal blockage mean for oil prices?

A stranded mega-ship has caused disruption to a key route for transporting crude but renewed fears about Covid-19 are dragging oil prices down

Prices for US benchmark West Texas Intermediate fell on Thursday on fears of lower demand (Getty Images/iStockphoto)

Oil prices tumbled on Thursday after spiking on Wednesday due to worries about a huge container ship that ran aground in the Suez Canal, blocking an important route for the transportation of crude.

The MV Ever Given, a Panama-flagged vessel operated by Taiwanese company Evergreen and owned by Shoei Kisen Kaisha Ltd, of Japan, became wedged sideways across the canal on Tuesday following strong winds.

What might the disruption mean for the price of oil?

The canal which runs between the Red Sea and Mediterranean allows oil to be transported from the big producing nations of the Middle East to Europe and the US.

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The grounded ship has blocked around 150 vessels from transiting along the canal so far including 10 that are carrying around 13 million barrels of oil - around an eighth of a day's supply for the world.

According to oil industry analysts Kpler, a relatively modest 4.4 per cent of crude oil that is transported by sea last year went via the canal. For refined products such as petroleum, the figure is 8.8 per cent.

“Despite relatively limited crude flows through the Canal, the closure puts pressure on regional markets,” Kpler said in a research note.

Last year Europe imported 550,000 barrels of oil per day from countries east of Suez, of which 520,000 barrels went via the canal.

Fears about that cargo and more being held up caused benchmark oil prices to spike by around 6 per cent on Wednesday.

Any disruption was initially expected to be short-lived, with engineers managing to partially refloat the Ever Given yesterday. Efforts to dislodge the ship were paused during low tide overnight and resumed again on Thursday morning.

However, the firm working to dislodge the container ship warned on Thursday that “it might take weeks”.

Peter Berdowski, chief executive of Boskalis, told the Netherlands’ Nieuwsuur television programme: “Bringing in all the equipment we need, that’s not around the corner.”

Concerns about a temporary oil supply shock pushing prices upwards are potentially outweighed by a much longer-term set of worries pulling oil prices in the other direction.

Brent crude, the primary global benchmark, fell 1.7 per cent on Thursday morning to $63.30 while America's main measure, West Texas Intermediate, was down 2.1 per cent to $59.91.

Demand for oil is closely correlated to global economic growth which now appears to be under increased threat from a resurgence of coronavirus.

Lockdowns have been introduced in a number of European countries and vaccine programmes have been slow to get going.

Mixed messages from politicians about the safety of the Astra Zeneca vaccine — despite medical authorities declaring it to be safe — have also hampered the rollout internationally.

A further wave of restrictions could push any economic recovery off course in a far more devastating way than the Ever Given.