Key Takeaways:
A drone strike on two gas tankers at Egypt's Damietta port has renewed fears that the Suez Canal — the last viable export route for Saudi oil — could become the next target in the widening Middle East conflict.
A drone strike that damaged two gas tankers at Egypt's Damietta port has raised the risk of disruption to the Suez Canal, a vital export route for as much as 5 million barrels a day of Saudi oil rerouted from the Strait of Hormuz.
"The passage through the Red Sea, even via the longer Mediterranean route, could be put at risk, which threatens up to 5 million barrels per day of oil supply that can currently bypass the Strait of Hormuz," said Saul Kavonic, head of energy research at advisory company MST Marquee.
No party claimed responsibility for Wednesday's strike on the US-owned Energos Winter floating storage vessel and the GasLog Salem tanker at Damietta, located on a Nile Delta branch near the Mediterranean. The Houthis denied involvement, with the group's foreign affairs office calling reports "unfounded" via the Saba news agency. Crude loadings via the Sumed pipeline — which crosses Egypt from the Red Sea to the Mediterranean port of Sidi Kerir — surged to 28.79 million barrels in July from 19.52 million in April, Kpler data show, as tankers avoid both Hormuz and the Bab el-Mandeb strait.
Any disruption to the Suez Canal would have an "almost immediate impact on prices," said Matthew Wright, principal freight analyst at Kpler, because longer voyages around Africa would push up freight costs and delay crude deliveries to Asian refiners by roughly a month. Insurers may also command higher war-risk premiums for canal transits, said Martin Senior, head of LNG pricing at Argus, even without a specific threat to the waterway.
Oil Flows Shift as Chokepoints Close
Hardly any tankers are passing through the Strait of Hormuz, previously the route for about a fifth of global oil and LNG supply, after Iran threatened to stop all Middle Eastern energy exports. Saudi Arabia rerouted most of its crude to the Red Sea's Yanbu terminal after the war began, but Houthi threats since July 20 have pushed many vessels north toward Suez instead of south through Bab el-Mandeb.
About 30 ships have clustered at the Port Said anchorage at the canal's Mediterranean end, up from about 20 earlier this week, MarineTraffic data show. About 43 percent of Yanbu loadings headed south in July, down from 81 percent in June, according to Kpler. Some vessels, including Chinese tankers, have received Houthi permission to pass, while an increasing number are traveling with their trackers turned off, said George Morris of energy analytics firm Vortexa.
Canal Security Under Scrutiny
The Damietta strike marked the first attack on Egyptian territory since the US-Iran conflict erupted, extending the theater from the Gulf and Red Sea into the Mediterranean. While the canal is "heavily guarded and secured around the clock," said Wael Kaddour, a former Suez Canal Authority board member, the incident showed that the canal zone lies within drone range of Iran-backed groups.
"An attack anywhere within the canal region would substantially increase war risk insurance premiums," said Corey Ranslem, CEO of maritime security group Dryad Global. "It would also substantially change the security assessment of the region."
The market has not yet priced in canal disruption, said Aly Blakeway, head of Atlantic LNG at S&P Global Energy. Oil prices fell on Thursday as traders focused on Iranian-Omani talks over Hormuz, with Brent crude slipping from last week's $102 peak. The rerouting of Saudi crude through Suez and Sumed — which has capacity for 2.5 million barrels a day — shows the canal's critical role in keeping global supply chains intact as the conflict spreads.
This article is for informational purposes only and does not constitute investment advice.
