Red Sea tensions: current situation and long-term impact on oil and shares

The
importance of the Red Sea for the global economy can’t be overestimated.
Nowadays, it’s the shortest and the cheapest trade route between Europe and
Asia. According to the Joint Statement of the White House, around 15% of global
maritime trade went through it until the Houthis started to attack commercial
vessels in November 2023.

The Houthis,
who initially targeted ships associated with Israel, are attacking vessels from
other countries, namely those that support Israel. This is forcing large
shipping companies to change their routes from the Suez Canal to the Cape of
Good Hope, increasing freight and transportation rates. For example, from the
end of October to the end of January, the Shanghai Containerized Freight Index
(SCFI), one of the leading container indices used to assess global trends,
surged by over 1,000 points.

Financial
markets experienced enormous volatility due to the high levels of uncertainty.
In March 2024, tensions are still high. Let’s take a look at what is happening
to the markets today and what analysts say about the effect of Red Sea tensions
in the long run.

Note: the conflict
influences different industries and markets, but we look at those affected the
most: oil, equities, and Forex.

Oil

According to
the latest U.S. Energy Information Administration (EIA) report, in the first
half of 2023, the transportation volume of oil and petroleum products through
the Bab el-Mandeb Strait reached 8.8 million barrels per day, which is 12% of
total seaborne-traded oil.

The attacks
led to a dramatic cut in oil flow volume via the Bab el-Mandeb Strait.
According to the U.S. Energy Information Administration (EIA) report, in
December 2023, it decreased by 18% compared to the January–November 2023
average. The transportation of clean petroleum products fell by 30% in December
compared to the rest of 2023.

It was
predicted that the conflict in the Red Sea would cause an increase in prices of
Brent and WTI crude oil as the supply was disrupted. Companies needed to
reroute their ships, which led to a rise in the time of shipment and additional
costs. In December 2023, the volume of oil passing to Europe from the Middle
East halved to about 570,000 barrels per day, compared to 1.07 million barrels
per day in October.

However,
both Brent and WTI formed medium-term downtrends. This might happen because the
market was sure there was too much supply in the world to worry about the lack
of oil. The U.S. produced record volumes, while Europe had enough natural gas
for the winter. At the same time, analysts stated that weak oil demand was due
to a warm winter and China’s economic problems. Moreover, rumours that the
Houthis would unlikely attack ships of politically friendly countries like
Russia and Qatar lowered the fear of reduced supply.

The
situation changed quickly. The conflict continued with no certainty as to when
it would be resolved. Also, OPEC+ countries couldn’t allow prices to keep
falling. As a result, the trend changed. From the end of December to the middle
of March, Brent and WTI prices went up, supported by OPEC+ production cuts and
problems with redirecting cargo from the Red Sea.

However,
it’s too early to talk about the strength of a new uptrend. According to
analysts, the conflict benefits oil prices but won’t trigger a spike. Moreover,
conflict resolution may bring vessels back to the Red Sea, facilitating supply
and putting pressure on oil prices again.

Shares

The stock
market, known for its inherent volatility, has seen an increase in fluctuations
due to rising tensions in the Red Sea. These developments have led to
heightened volatility across a broad range of industries, extending beyond just
the oil and gas sectors. International retailers and car manufacturers, among
others, are facing challenges such as shipping delays, rising costs, and
consumer dissatisfaction. In contrast, the shipping industry stands to benefit
from the situation, as geopolitical tensions contribute to increased tariffs
and shipping fees, generating a positive impact for carrier companies.

Forex

Red Sea
tensions bear a risk not only for equities and oil but also for the world’s
economy and the Forex market. The Organisation for Economic Co-operation and
Development (OECD) consists of 38 of the world’s largest economies, including
the U.S., U.K., and European countries. It claims that shipping costs could
hinder the global fight against inflation. OECD forecasts that costs could add
0.4% to overall price growth for the year.

Global
economies, including the U.S., the E.U., and the U.K., have to postpone
interest rate cuts due to high inflation. Therefore, this may be a risk for
their economies but a good sign for domestic currencies. High interest rates
usually lead to a country’s currency becoming stronger. However, the situation
isn’t that simple. Markets may have already priced in a few rate cuts this
year.

Therefore,
higher inflation may have a limited effect. Moreover, the OECD admits that the
conflict in the Red Sea is just a risk but not what they believe to be a real
threat. Moreover, the chief economist at OECD, Clare Lombardelli, admits that
the conflict in the Red Sea is just a risk but not what they believe to be a
real threat.

Another
factor that can affect Forex is global market sentiment. News related to the
success of the coalition headed by the U.S., which includes the United Kingdom,
Italy, and France among others, may have a positive impact on the U.S. dollar,
British pound, and euro. The strength of the Houthis may put pressure on these
currencies.

Still, the
effect of both events is likely to be short-term. Tensions aren’t the only
driving factor for the Forex market. Many aspects, including economic
indicators and countries’ monetary policies, may have a greater impact on the
currencies.

Final Thoughts

The armed
conflict in the Red Sea undoubtedly has a strong negative impact on financial
markets and bears risks for the global economy. However, the influence may not
be that strong in the long run.

According to
the Octa analyst, although the tensions in the Red Sea have already caused
plunges and surges in the financial markets and may cause undesirable
consequences for the global economy, the actual impact will depend on numerous
factors, including other geopolitical tensions and global economic conditions.
Traders should keep watching the factors that may affect the markets.

Although the
tensions in the Red Sea have already caused plunges and surges in the financial
markets and may cause undesirable consequences for the global economy, the
actual impact will depend on numerous factors, including other geopolitical
tensions and global economic conditions. Traders should keep watching the
factors that may affect the markets’,—said Kar Yong Ang, Octa’s financial
market analyst.

About Octa

Octa is an international broker that has been providing
online trading services worldwide since 2011. It offers commission-free access
to financial markets and various services already utilised by clients from 180
countries with more than 42 million trading accounts. Free educational
webinars, articles, and analytical tools they provide help clients reach their
investment goals.

The company is involved in a
comprehensive network of charitable and humanitarian initiatives, including the
improvement of educational infrastructure and short-notice relief projects
supporting local communities.

Octa has also won more than
60 awards since its foundation, including the ‘Best Educational Broker 2023’
award from Global Forex Awards and the ‘Best Global Broker Asia 2022’ award
from International Business Magazine.

This article was written by FL Contributors at www.forexlive.com.