Suez Canal closure highlights Asia’s growing dependence on Eastward oil flows

Earlier this week, a 400 meter-long container ship halted transit in both directions on one of the world’s major seaborne trade chokepoints after running aground across a single-lane stretch of the canal. Getting the vessel out of the way may take days if not weeks, according to maritime experts.

So far, the blockage hasn't caused a significant disruption in oil markets. While the inventory overhang that built up last year is gradually being worked off, crude and oil product stocks globally remain at comfortable levels. And some of the world’s largest and newest tankers are anyway too big to use the canal.

The Suez Canal was inaugurated in 1869, at the dawn of the oil industry. Over time, oil became one of the most important commodities to transit the channel. For modern vessels, the canal cuts travel time between North America or Europe and the Middle East or Asia by almost two weeks by avoiding the much longer route around the Cap of Good Hope, at the tip of the African continent.

But the closure underscores recent changes in global oil trade. While the common perception is that oil transiting through the canal is largely made up of crude from Middle Eastern headed to Europe or North America, in reality the majority of the oil traveling through the canal is now headed in the opposite direction to feed Asia’s burgeoning economies.

While the canal can accommodate all traditional clean oil product tanker sizes, very large crude carriers (VLCC) can only transit the canal when loaded below their 250,000 tonnes capacity. Suezmax crude tankers, able to carry up to 200,000 tonnes of crude oil, are specifically designed to navigate through the canal. But in recent years, the growing fleet of ultra large crude carriers (ULCC), with deadweight ranging between 300,000 and 500,000 tonnes have reshaped crude oil routes as they can only load and offload at specially adapted ports and cannot transit fully laden through three of the world’s major chokepoints – the Strait of Malacca, the Suez Canal and the Panama Canal.

Two pipelines connecting the Red Sea to the Mediterranean that offer an alternative to the canal, the 2.5 million barrels a day (mb/d) Sumed pipeline runs through Egypt, and the 600,000 barrels a day Europe-Asia pipeline, through Israel. Both pipelines have generally operated in the west/northbound mode and have limited or untested capacity in the reverse direction.

That’s not to say the Suez Canal doesn’t still play an important role in the global oil trade. About 5% of world’s crude oil, 10% of oil products and 8% of LNG seaborne flows transit the canal. It also has a symbolic significance, splitting the world into two distinct regions for oil markets analysis purposes: East of Suez, which combines the Middle East and Asia Pacific, and West of Suez (more commonly referred to as the Atlantic Basin), comprising the Americas, Europe, Africa and the former Soviet Union. While most oil trade takes place within its own region, the size, direction and content of flows between them have undergone some dramatic changes over the last decade.

Just 15 years ago, East of Suez was a net exporter of crude oil as Middle East crude production was 4 mb/d-to-5 mb/d in excess of what they and Asia consumed. Europe and the US combined imported almost 5 mb/d of crude oil from the Middle East. The situation reversed about a decade ago, when the burst of oil supply from the United States, Canada and Brazil combined with rapid economic growth in Asia to flip the crude oil balances of both hemispheres. Since 2016, Asian crude oil demand has surpassed Middle Eastern crude oil exports, with the gap being filled by barrels from the Atlantic Basin. US and European imports of crude oil from the Middle East have fallen to just 1.2 mb/d. At the same time, exports from Europe (North Sea) and the United States to East of Suez have increased to 2 mb/d.

This trend is well reflected in Suez Canal transit figures, where eastbound crude oil flows of around 1.1 mb/d well exceed westbound flows of just 0.4 mb/d. Even including estimated volumes for the transit pipelines, eastbound crude oil shipments are higher. The reason for bi-directional trade is the varying qualities of crude oil. Europe and the United States export lighter grades to Asia, while importing medium-heavy grades from the Middle East. However, most of the nearly 6 mb/d crude oil flow from the Atlantic Basin to the East of Suez is already taking the southern route to Asia around the Cape of the Good Hope, especially cargoes originating in North and Latin Americas and West Africa.

Crude oil fundamentals, East of Suez, 2006-2026

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Our Oil 2021 report, which was published just last week, shows that the dependence of East of Suez crude oil importers on the Atlantic Basin is set to increase, with global oil demand growth coming essentially only from the East of Suez. In a sharp contrast to the pre-pandemic period, oil demand is expected to fall in the Atlantic Basin. 

Oil demand and refining capacity changes East of Suez, 2012-2026

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Oil demand and refining capacity changes in the Atlantic Basin, 2012-2026

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Increased crude oil imports into the East of Suez are driven by the growth in refining activity. In 2020, Atlantic Basin refinery throughput fell to the lowest in 50 years because of Covid-19 induced lockdowns and are not expected to ever return to pre-pandemic levels. The refinery intake East of Suez suffered a less dramatic decline and will return to 2019 levels by the end of this year. Although Atlantic Basin crude oil demand remains higher than East of Suez, in our forecasts, the gap shrinks dramatically and points at a convergence some time later this decade.

Refining throughputs in Atlantic Basin and East of Suez, 1971-2026

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The rapid growth in East of Suez refining activity has generally matched the pace of demand growth in the region, meaning that product trade between the hemispheres has seen less dramatic changes, compared to crude oil. But in the product trade as well, eastbound flows dominate Suez Canal flows, with a total of 1.3 mb/d transiting west-to-east, and 0.8 mb/d going in the opposite direction.

Almost half of eastbound flows is fuel oil, for power generation in the Middle East or for marine bunkers, with the rest primarily consisting of naphtha and LPG cargoes, destined for Asian petrochemical crackers and Indian household consumption. These products are generally priced at a discount to crude oil, and Asian imports help clear natural surpluses in Europe and the US. On the other hand, westbound flows are mostly premium transport fuels, in particular, jet fuel and diesel for European importers from the more complex and better equipped refineries in the Middle East and Asia.

With increased crude oil and petro-chemical demand in Asia, the flows through the Suez Canal are likely to rise again. The current incident with the canal shutdown is happening at a time when the world is still recovering from the pandemic, with ample crude and product storage, and this has helped minimise oil supply disruption and price reaction. But when the global economy and oil demand returns to normal levels, the Suez chokepoint will regain its importance.