What Suez Canal blockage could mean for global trade

WATCH: Massive ship runs aground, blocking Suez Canal

The Suez Canal, a key waterway for global trade, is currently blocked by a container ship that has run aground and is delaying ship movement. This is helping oil prices recover but will have major repercussions for trade.

What has happened?

A Panama-flagged ship called Ever Given, 400 metres long and 59 metres wide, was heading to The Netherlands from China, and ran aground Tuesday morning after it reportedly lost power.

The ship now blocks the path of other vessels travelling in both directions across the Suez canal and there are reportedly 15 ships behind it waiting for the traffic to resume. Egyptian tug boats have so far failed to pull the ship free.

Why is the canal so important?

The Suez Canal, built in 1869, is an artificial sea-level waterway in Egypt, connecting the Mediterranean Sea to the Red Sea.

It's one of the world's busiest waterways. "Even the slightest delay in traffic can result in congestion and disturb the delivery of goods and commodities on both sides," according to S&P Global Platts.

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Large volumes of consumer goods from China and South Asia to Europe, crude and refined products from Persian Gulf and India to Europe, naphtha from Europe to Asia and crude from the Persian Gulf to US Gulf cross the canal.

The US imports around half a million barrels of crude daily from Saudi Arabia alone — equivalent to around one Aframax cargo — a part of which goes via the Suez Canal.

What does this mean for trade?

The blockage will impact the entire trading schedule for millions of tons of commodities, market participants told S&P, and they are reworking itineraries for commodities worth billions of dollars, which could involve significant demurrage costs.

Bloomberg explained that "European and US refiners that rely on the vital waterway for cargoes of Middle Eastern oil may be forced to look for replacement supplies should the blockage persist, potentially boosting prices of alternative grades. At the same time, flows of crude from North Sea fields destined for Asia will be held up."

What does this mean for oil prices?

Prices rallied on Wednesday. Brent futures (BZ=F) and crude futures (CL=F) were up 2.5%.

“Oil prices moved higher today after a massive container ship blocked the Suez Canal in both direction, which followed the sharp demand-driven fall on Tuesday amid doubts about the demand-led recovery from Europe this summer and another build in oil inventories,” explained Neil Wilson, chief market analyst for Markets.com.

Noting that about 10% of global seaborne oil passes through the canal, Marshall Gittler, head of investment research at BDSwiss Holding said that the problem should be soon fixed “so I doubt if it will have much lasting impact."