Hurricane Beryl has been causing death and destruction throughout the Caribbean since Wednesday, as the BBC describes:
“Hurricane Beryl is wreaking havoc in parts of the Caribbean – and putting the role of climate change under the spotlight. With maximum sustained wind speeds of more than 160mph (257km/h), it became the earliest category five Atlantic hurricane in records going back around 100 years. In fact, there has only been one previous recorded case of a category five Atlantic hurricane in July – Hurricane Emily, on 16 July 2005.”
Tropical Atlantic much warmer than usual
Sea surface temperature in April 2024 compared with April 1991 – 2020 average
Sea temperatures in the Atlantic ocean are at exceptional levels as the chart shows. And the heat is fuelling stronger hurricanes:
- The current hurricane season is expected to be very powerful, as it also coincides with a move from El Nino to La Nina conditions
- US weather agency NOAA is forecasting the number of Category 3+ hurricanes could double this year as a result
OIL AND NATURAL GAS PRICES ARE ALREADY RISING AS MARKETS WORRY ABOUT OUTPUT LOSS
Crude Oil Brent
July 2023 – July 2024, $/bbl
Of course, its not just a risk to life and property, as the US Energy Information Administration notes:
- The US Gulf accounts for 15% of US oil production, and 5% of US dry natural gas output
- 47% of total US petroleum refining capacity is located on the Gulf coast and 51% of natural gas processing plant capacity
Oil and gas rigs have to be shut down and their crews evacuated when the hurricane risk is high.
And land-based facilities can also be impacted. Hurricane Harvey shut down 4.4mbd of refining capacity in 2017 and had a major impact on natural gas and petrochemicals output.
Oil and gas prices typically rise during hurricane season as traders worry about output losses. And this year, prices have already begun to react, as the chart shows.
FREIGHT RATES ARE RISING AND DELAYS INCREASING AS RED SEA ATTACKS CONTINUE
Avoid the Red Sea Means Much Longer Shipping Routes
At the same time, the impact of the Houthi attacks is increasing, as the chart shows. We first highlighted the issue in January, noting that:
“Sailing from Asia to Rotterdam via Cape of Good Hope takes 36 days, versus 26 days via the Suez Canal.”
It has also led to the use of new ports and new shipping routes to maximise utilisation rates. None of this is easy, as we discussed on last week’s podcast.
30% of global container traffic typically uses the Red Sea route. And major shipping company Maersk has suggested:
- The delays have effectively reduced industry-wide capacity by 15%-20%
- Fuel costs are also 40% higher for the Cape of Good Hope route, versus the Red Sea
Back in January, “Container freight rates had sky-rocketed from $930 on 30 October to $4,857 on 22 January“. Today, they are up nearly 75% from the October rate to $6,918.
Shortages of containers are also increasing, as the journey is taking so much longer. And product availability is being reduced, as orders are taking longer to ship.
So, of course, costs are rising for consumers. Shipping experts suggest that most available space is already fully booked for the vital pre-Christmas trade. And some companies are being forced to turn to the already overheated air freight market to ensure their goods arrive in time, as the Journal of Commerce reports:
“Volume and rates on the main air cargo trade out of Asia and the subcontinent rose sharply in May from already inflated levels as months of container shipping disruption continued, supporting the modal shift from the ocean…overall average rates in May from Middle East and South Asia origins to Europe were up 77% year over year.”
And, of course, nobody knows what will happen next in the Gaza conflict. The New York Times suggests Israel’s assassination of a senior Hezbollah commander last week risks:
“A Hezbollah-Israel war (which) could metastasize into a larger regional conflict that could dwarf the current fighting and draw in Iran and the United States.”
In turn, of course, that would likely impact the oil market, pushing prices back over $100/bbl for the first time since August 2022. The Houthi attacks and increased hurricane risks highlight how geopolitics are replacing economics as the key driver for decisions. Global supply chains are increasingly being replaced by local-for-local operations as producers aim to improve reliability and control costs.