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The Suez Canal blockage: How it will affect the automakers and Oil Supplies and Price

A 400m cargo ship Ever Given had got stuck in the Suez Canal since Tuesday, blocking all movement through the canal. It is now cleared, but be ready to face some challenges for a short-term period.

Several large container ships were seen lined up in Port Said on Friday, helplessly.

The Suez Canal carries nearly $10 billion worth of goods every day, and clearing this logjam is key to reducing the economic fallout.

The Canal is a man-made waterway that connects the Mediterranean to the Red Sea. It is a shipping shortcut between Europe and Asia and also one of the busiest waterways in the World.

This logjam has caused shipping rates for the oil product tankers to nearly double since last week, and several vessels have already been diverted from this vital waterway. More than 30 Oil tankers have to wait since Tuesday on either side of the canal.

It has created serious disturbances for shipping lines and retail supplies to the customers across both sides of the canal.

Why the Suez Canal is so vital!

10% of the global trade flows through the 120-mile long canal. The canal allows the tankers and container ships to avoid the long trip around the southern tip of Africa.

The iconic shipping journal Lloyd’s List has estimated that goods worth $9.6 billion pass through the canal every day with about $5.1 billion of that traffic being westbound and $4.5 billion eastbound.

Container ships contribute to about one-fourth of that traffic; and more than 50 ships pass the canal on an average day, carrying with them around 1.2 billion tons of cargo.

The blockage had affected the supplies, to Europe, of products like cotton from India, petroleum from the Middle-East (for plastics), and auto parts from China, he said.

“The fact that you have the most pivotal node in the trading network being blocked is going to have important welfare effects around the world,” said Woan Foong Wong, an economics professor at the University of Oregon.

The US may not be affected directly as Europe as the US receives most of its shipment from Asia on the West Coast. However, there could be an effect on the imports from Europe.

And the struck containers not returning could affect the cycle of transit ships and in turn the supply of rapidly increasing surge in consumer goods during the pandemic.

“If you get a bump in one place, that is going to percolate through the system,” Ganapati said. “It is going to take a while to get things un-gummed up.”

Already the shortages of semiconductors and rare-earth elements have affected the manufacturers of cars and other consumer products

Congested ports have meant that the goods are not getting unloaded fast enough; and the crew trapped at ports during the Pandemic, putting human life at risk.

“We have lots of things indicating a vulnerable supply chain at risk for disruptions, and now you put one more thing on top of that,” said Julie Swann, a logistics expert at North Carolina State University.

It may push up oil prices, “but we are not talking dollars on the barrel, we are talking pennies on the barrel,” Zandi said.

In Europe. The German economy would suffer as the blockage delays the shipment of auto parts to that company's large car manufacturers, Zandi said.

And Spain, Italy, and France would higher oil prices, as their oil shipments are through the canal, Ganapati said.

About 1.9 million barrels of oil a day go through the canal, according to Lloyd’s. That’s about 7% of all seaborne oil.

S&P Global Platts Analytics said about 1 million barrels of crude and 1.4 million barrels of gasoline and other refined products flow from the Middle East and Asia north through the canal to Europe on a daily basis.

Jim Burkhard, who heads crude oil research at IHS Markit, said the impact on the global oil market will be limited if the canal is cleared soon.

Energy demand is still weak due to the pandemic, and the Sumed pipeline has unused capacity to move oil around the canal, from one end near Alexandria, Egypt, to a terminal near the Red Sea.

“If this would have to lasted a month, there are other options — you can sail around Africa. Of course, that would add cost.

The price of benchmark international crude had risen after the blockage, but prices dropped Thursday. Analysts have attributed the price drop to an industry group’s report of large U.S. inventories and concern that pandemic-related lockdowns in Europe will further weaken demand for energy – outweighing concern about the stuck ship.

Movement of petroleum products will be slowed?

Shipments of Europe-bound refined petroleum products such as gasoline and jet fuel will be delayed. And, Burkhard said refineries in Europe could be pushed to temporarily increase production to pick up the slack.

Tankers using the Suez carry 8% to 10% of the world's liquefied natural gas, as per research firms.

Wood Mackenzie analyst Lucas Schmitt said only a few LNG shipments were near the canal when the blockage had occurred.


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