Energy: The US Has Declared War on Brics Oil
Energy Exclusive: The US Has Declared War on Brics Oil
Background: Global Changes Hit Oil
Last year showed the importance of Geopolitics as molder of economic relationships. Four major events these past couple years must now be digested by world governments. These are now slowly but very predictably working their way through the system altering policy, behavior, and thus standards of living. [EDIT- Like in the 1970s inflation before; it is happening again] Oil is once again a key asset in which these changes will occur.
Those four recent events in chronological order now upsetting the oil status quo were: The Pandemic (revealing fragile supply-chains), the Ukraine/Russian war (started deglobalization), Western Sanctions (hastened the ROW’s desire to exit USD), and Zoltan’s ensuing commodity collateral crisis (a byproduct of rising mercantilist-protectionist policies). As Brynne says...nothing will ever be the same. The west has declared war on Brics economies in the form of their oil revenues to combat the East’s intended dropping of the USD. Let's look at how this is manifesting this past week in oil policy.
Oil: One Year Later and Nothing Will Ever Be the Same
contributions VBL
Our week did not have any particular event fireworks compared to the last 8 months or even the last 8 weeks. But there were some very real, very important changes worth noting. These will effect the way we do business going forward and may affect price (or spreads) overnight as these things can do sometimes.
Suez Canal Surcharges Increase- makes Dubai less competitive
WTI Invades Brent- makes US a bigger supplier
EIA Bearish Report Questioned- makes global prices drop
Futures Structure - shows global inflation is baking in
We are definitely seeing the longer term effects of the world-split and anniversary of the Ukraine/Russian war manifest in practices, policies, and inflation-risk on a more permanent basis. Here are a few of them…
1- Suez Canal Surcharges Increase
On Tuesday, February 14 Egypt's Suez Canal Authority (SCA) said it will increase transit surcharge fees for crude oil and petroleum product tankers. The new 25% transit fee surcharge will apply to product tankers transiting the canal both ways starting April 1, 2023.
The “Temporary” Old Hikes
According to the circulars, the surcharges are for both laden crude oil and petroleum product tankers. They include increases from 15% currently to 25% of normal transit fees, while empty (ballast) tanker surcharges will increase to 15% from the present 5%.
These are increases to already existing surcharges themselves in place for less than a year started May 1, 2022. The fresh hike increases were explained by the SCA as due to: "[S]ignificant growth in global trade, the improvement of ships’ economics, the Suez Canal waterway development, and the enhancement of the transit service.”
For perspective, here are the reasons for the prior increases set in May 2022
[T]he increase in surcharge has been made because of the significant growth in global trade, the improvement in the ships' economics, and the enhancement of the transit service the agency provides. These surcharges are temporary and may be amended or wholly rescinded if the maritime market conditions warrant it.
The new reasons are almost exactly the same as the old reasons with one important exception. This time we didn't see them say it was temporary.
In response to the 2022 rate increases, an analyst told CNBC that while the rise in Suez dues wouldn't have a “massive impact” on trade flows, it will fuel ongoing inflation.
“Oil prices are currently dropping and so if the canal prices itself out against the competition (which is going round Africa) then the Canal Authority would lose out,” said the chairman of Mandarin Shipping, Tim Huxley.
Therein lies the rub. Last year's increases were meant to be temporary and keenly kept an eye on in order to avoid opening the door for the longer trip around the 'Horn' of Africa as a cheaper, competitive alternative.
The Permanent New Hikes
Yet, Instead of these 'temporary' increases being short-lived, they will now be increased again in April 2023. Clearly the last hike didn't have a 'massive impact' on trade flows - the door was NOT opened significantly for the alternative route. Increased fuel and insurance costs had kept the longer Horn route less competitive.
The SCA seems to now be exploring their convenience advantage more aggressively. They believe rates can increase again without undermining their competitive advantage over the longer route. This is possibly based on increased shipping costs making Horn costs increase. At the simplest level, it increases the cost of Dubai and other Middle Eastern oil delivered to Europe.
Suez Importance
The canal is the shortest route connecting Europe and Asia, and nearly 12% of global trade by volume transits through it daily. According to the Suez Canal Authority, almost 19,000 ships sailed through the canal in 2020, or 51 ships per day on average. About 5% of world's crude oil, 10% of oil products and 8% of LNG seaborne flows transit the canal.
Crude Benchmarks in Relation to the Suez Canal... The US is now closer to the EU than the M.E.
The EverGreen Addendum
In March 2021, the Evergreen container ship named Ever-Given famously got stuck between the two banks of the canal, obstructing the Suez entirely. This caused an immediate rise in the price of Brent crude oil- from $63.90 per barrel to $67.00. We wrote about this back in March 2021.
Effect on Global Oil Spreads
Saudi Arabia has been raising its prices to reflect new-found demand in Europe and cutting prices to Asia as it looks to compete with Russia. For March delivery, they set their Arab Light OSP to northwest Europe at 50 cents a barrel above ICE Brent for March, $2.00 a barrel higher than its price for February. The official selling price for March-loading Arab Light to Asia was raised by 20 cents a barrel from February to $2.00 a barrel over Oman/Dubai quote. Both increased by $2.00 a barrel, which should have little impact on the Brent/Dubai spread.
That leaves the marginal increase in Suez Canal rates to tip the scale. Meaning, shouldn't Brent oil increase relative to Dubai IF there is demand for both grades and other price factors seem to be stable?
However, the price of Brent has continued to weaken relative to Dubai this year, signifying even less demand pull from Europe. The market is either more efficient than we knew, or it is widely inefficient given these changes. Hard to say, but it is on our radar. Overtime, this should lessen the competitive advantage of the Suez and with it, Dubai oil as a European import. We took out Russian oil. Dubai is next.
Read the other 3 developments here.
