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The wild attacks on ships in the Red Sea are another geopolitical shock that could drive up inflation

George Glover   

The wild attacks on ships in the Red Sea are another geopolitical shock that could drive up inflation
Investment3 min read
  • Yemen's Iran-linked Houthi rebels are attacking ships in the Red Sea.
  • MSC, Maersk, and oil giant BP have responded by rerouting vessels away from the Suez Canal.

Attacks on vessels by rebels linked to Iran in the Red Sea have forced big-name shipping and oil giants to reroute their vessels away from the Suez Canal, the crucial and busy shipping lane that connects the strip of water to the Mediterranean.

Analysts are warning the disruption could drive up crude prices, delay deliveries, and trigger a flare-up in inflation.

Here's what you need to know.

What's happening in the Red Sea?

The Houthis are an Iran-aligned militant group that controls much of northern Yemen, a war-torn and poverty-stricken country in the Middle East. Per AP, the group's official slogan is: "God is the greatest, death to America, death to Israel. Curse the Jews, victory to Islam."

Since Hamas' terrorist attacks on Israel on October 7, the Houthis have used drones and rockets to target ships in the Red Sea to try and pressure Israel into a ceasefire in Gaza.

Shipping giants MSC, Maersk, Hapag-Lloyd, and UK oil-and-gas super major BP have responded to the attacks by rerouting vessels away from the Suez Canal, the vital waterway that connects Asia to Europe and the US.

Their ships will likely instead sail around the Cape of Good Hope on the southern tip of Africa in a diversion that could extend journey lengths by around 3,300 miles, per the New York Times.

Why is the Suez Canal important?

If chaos at the Suez Canal sounds familiar, cast your mind back to the summer of 2021 — when the Ever Given's six-day grounding triggered supply-chain chaos and held up around $60 billion worth of goods.

The incident was a reminder that the man-made waterway is a vital link for global commerce, with around 15% of the world's total shipping traffic passing through it each year, according to data from Reuters.

Chinese car parts, Indian cotton, and consumer goods including TVs, clothes, and sports equipment all pass through Suez on container ships. The canal is also a crucial energy route.

"The Suez Canal has become an increasingly important thoroughfare for the shipping industry since the pandemic, with transits rising by roughly a third in the past two years," Bank of America commodity strategist Francisco Blanch said Wednesday in a research note.

"Nearly every sector within the shipping industry has seen improvement in tonnage through the Suez Canal, but petroleum has been the clear leader since 2021 as more Russian volumes move to India, China, and elsewhere."

Some 12% of seaborne oil and 8% of liquefied natural gas traded worldwide passes through the chokepoint each year, according to data from the US Energy Information Administration.

How is the chaos impacting oil prices?

Shipping delays are already driving up oil benchmarks at a time when global supply has already tightened due to the OPEC+ cartel's production cuts.

Data from Refinitiv shows that Brent crude futures have climbed 8% to over $80 a barrel over the past week, while West Texas Intermediate crude futures are up 8% to just under $75 a barrel over the same period.

The flare-up comes toward the end of a quarter where oil prices have tumbled. Both Brent and WTI could climb by another $2 a barrel, Saxo Bank technical analysts said Wednesday, "with the driver being the elevated risks posed by potential attacks from Yemen's Houthi rebels on tankers passing through the Red Sea".

Could this drive up inflation?

Lower price pressures have been a source of relief for the world economy over the second half of 2023. US inflation rose just 3.1% in November, while UK data published Wednesday showed a sharp cool-off between October and last month.

But forecasters are fretting that a prolonged standoff in the Red Sea could trigger rises. Crude benchmarks rising will have a knock-on effect on gas, while shipping companies could respond to longer journey times and higher insurance costs by charging consumers higher prices.

"Issues in the Red Sea threaten supply chains and have pushed up the oil price, both drivers for inflation," AJ Bell investment director Russ Mould said Wednesday. "Therefore, this is a somewhat muddy situation."

Suez also isn't the only major international waterway experiencing difficulties, with a severe drought forcing the freshwater-filled Panama Canal to slash its capacity, leading to delays that have already likely hampered Americans' holiday-season shopping.

Investors are already more worried about geopolitics than anything else, according to a recent poll by Natixis – and the chaos in the Red Sea should serve as yet another reminder that wars in Europe and the Middle East could derail the world economy's miraculous recovery next year.


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