Nitesh Shah, Director, Research, WisdomTree

Oil prices have had a wild ride this week. On 23 March 2021 Brent oil prices fell 6.5 percent, and on 24 March oil prices are close to recouping those losses. Initially under the pressure of a weakening economic outlook for Europe, markets revised downwards demand projections. But as news of supply disruptions to oil coming out of the Persian Gulf, oil prices have risen today.

Oil prices

Source: Bloomberg, WisdomTree. 11 March 2021 to 24 March 2021. Blue line: Generic first Brent futures price. White line: Generic first WTI futures price. Historical performance is not an indication of future performance and any investments may go down in value.

The Ever Given vessel has been grounded in the Suez Canal, effectively blocking this chokepoint. The Suez Canal and the SUMED Pipeline are strategic routes for Persian Gulf crude oil, petroleum products, and liquefied natural gas (LNG) shipments to Europe and North America. The Suez Canal connects the Red Sea with the Mediterranean Sea and is located in Egypt. Around 1 million barrels of crude oil passed through this chokepoint each day. It may not be as strategically important as the Strait of Hormuz or Strait of Malacca, but its blockage is still capable of making a meaningful dent on the flow of oil and other energy products around the world.

It is unclear how long it will take to unblock the vessel. The Organisation of Petroleum Exporting Countries (OPEC) and its partner countries may choose to increase supply to counter this supply shock. However, given the recent revisions to demand, we suspect that it will maintain its course on supply.

On Friday 19th March, oil prices were temporarily bolstered as another potential supply disruption was factored in. A drone attack on a Saudi Arabian oil facility initially drove concerns about supply outages. However, that quickly gave way to the demand concerns mentioned earlier. We think that as supply resumes from the Suez Canal, this supply shock premium may quickly dissipate.

Source: Energy Information Administration