Suez Canal blockage hits LNG less than crude

Suez Canal blockage hits LNG less than crude
Photo: kees torn

At the end of March, the Suez Canal was blocked for six days by a container ship that ran aground due to strong winds. Global supply chains were expected to be significantly impacted, as hundreds of cargo ships couldn’t deliver goods in time, but eventually, energy prices were subject to only a minor jump.

A recent blockade of the Suez Canal failed to move oil and gas prices significantly, says adding that the Suez crisis laid the developments in the global gas market bare. Energy prices were expected to surge, as before the disruption 10% of the world’s oil and 8% of liquid natural gas (LNG) went through the canal on a daily basis. However, the blockade’s effect on LNG prices was softer compared to oil, as the global LNG market didn’t face serious disruption.

The world’s largest LNG importers are predominantly located in East Asia and Europe, and in recent years, the balance has shifted towards Asia. The growing importance of the Asian market became one of the factors that helped LNG markets cope with the Suez crisis. Eastern economies require more and more raw materials and energy, while a lack of major pipeline infrastructure connecting them with producers makes shipped natural gas especially important for them. Even China, which has several pipelines to import natural gas, is seeing a rise in LNG imports due to a sharp rise in consumption. There is even more room for growth: Southeast Asia and India are also importing ever-larger volumes of LNG.

Container ship Ever Given stuck in Suez Canal, Egypt, 24 March 2021. Photo: Contains modified Copernicus Sentinel data 2021

Meanwhile, in Europe, domestic gas production is dwindling due to depletion or political reasons, while imports are on the rise. Europe is literally surrounded by countries that hold major gas resources, and its massive pipeline infrastructure connects it with multiple gas exporters. European LNG demand is rising, as the liquid fuel has become the preferred choice of diversification of energy supplies, but the majority of the consumed gas is still imported through pipelines. Several northwestern European countries also possess large storage capacity, which can act as a buffer in case of supply disruptions.

All these conditions have reduced price volatility, says concluding that short-term disruptions of the Suez Canal may have only a moderate effect on LNG prices. Nonetheless, if the blockage of the canal had lasted several weeks instead of days, it could have had a greater impact on LNG prices. Storages in Europe are already historically low due to the harsh winter, so a long disruption could have drained them to the end.

By Anna Litvina