Red Sea attacks jolt global trade dynamics

What does avoidance of the Red Sea mean for global trade?

Since December 15, 2023, major disruptions have occurred in one of the world's key shipping routes, the Red Sea.

This has been caused by escalated attacks from Iran-backed Houthi militants in Yemen, targeting global shipping lanes and attacking ships passing through the Red Sea.

Shipping companies, including industry giants like A.P. Moller-Maersk and Hapag-Lloyd, have rerouted vessels to avoid the high-risk area, opting for longer routes such as the Cape of Good Hope.

Now, a variety of other companies, including major container-shipping companies such as CMA CGM, Evergreen, MSC and oil giant BP have also decided to either paused or suspended their services in the Red Sea, a crucial passage for traffic from the Suez Canal.

This area, specifically the Bab al-Mandab strait, handles a significant portion of global trade, including around 12% by volume and nearly 30% of global container traffic.

This shift not only extends delivery times but also increases shipping costs, a burden likely to be passed on to consumers.

The immediate consequence of these tensions has been a noticeable uptick in oil prices. The international benchmark, Brent crude, rose back above $78.00 per barrel, a direct response to the perceived threat to one of the world's vital oil transit routes.

The current crisis presents two major challenges:

1 . The impact on the global economy

Approximately 10% of global trade, including a substantial portion of the world's container traffic, passes through the Red Sea annually and if the Arabian Sea is also perceived as risky, the implications for the global oil supply could be significant.

The longer transit times and heightened insurance premiums resulting from this diversion could have a cascading effect on supply chains and international trade.

For countries like Egypt, heavily reliant on revenue from the Suez Canal, the diversion of shipping routes poses a significant economic challenge.

Chart illustrating the monthly traffic through the Suez canal (Jan 2021 - Jan 2023)

Meanwhile, consumers worldwide could face higher prices for goods that could drive inflation higher.

2 . The possibility of escalating military tensions in the Middle East

With regards to the possibility of an escalation in military escalations, the below are a few factors to consider:

• Anti-ship arsenal: Houthis possess a significant arsenal, trained by Iran, posing a substantial threat in Yemen's conflict against Saudi Arabia and the UAE.
• Iran's involvement: Although Iran’s direct role in the attacks remains unclear, it is known to provide strategic support to Houthis and to use Houthis as a proxy to pressure Israel.
• International impact: Houthi actions drawing more nations into the crisis, complicating the situation.
• Potential military response: Multinational naval task forces led by the US near Yemen to deter Houthis are considering armed escorts for ships or direct strikes on Houthi arsenals.
• US and Israel stance: The US is hesitant to increase Middle East military involvement, focusing on diplomatic pressure while Israel is cautious due to tensions with Hizbullah.
• Escalation possibility: Continued Houthi attacks, especially those impacting global trade and backed by Iran, may lead to inevitable escalation.

Conclusion: navigating uncertain waters

As the situation continues to evolve, the global market remains poised on the edge of significant change. The Red Sea crisis not only highlights the interconnected nature of international trade but also serves as a reminder of the delicate balance within global market dynamics.

While the full extent of the market impact is yet to be seen, what remains clear is the need for agility and adaptability in the face of geopolitical upheavals.

Past performance does not guarantee or predict future performance. This article is offered for general information and does not constitute investment advice. Please be informed that currently, Skilling is only offering CFDs.