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The Suez Canal and SUMED pipeline choke points affected oil prices during the Arab Spring when oil prices were over $100 and at  a speculators zenith. The two routes account for around nine percent of the world’s daily seaborne oil.

Suez Canal and SUMED

The risk to oil prices of the disruption of critical chokepoints can be sudden and dramatic affecting oil prices. Almost two-thirds of the world’s oil trade travels via sea. The Suez Canal and SUMED pipeline is located in Egypt and both singularly or combined with the SUMED pipeline are crucial oil transport chokepoints.

The SUMED pipeline bypasses the Suez Canal connecting the Mediterranean and Red Seas. Combined the two routes account for around nine percent of the world’s daily seaborne oil, or 5.5 mb/d.

Most of the oil travels north from the Middle East to Europe. The canal’s revenues are the primary source of the Egyptian treasury’s foreign-exchange reserves. Suez Canal is currently the shortest route to maritime trade between Europe and Asia. However, Russia is working on developing the Northern Sea Route for companies to exploit it in trade between Europe and Asia.

The Suez Canal is used by VLCCs that are not fully laden because of the depth and can offload some of their cargo onto the SUMED pipeline, and then the lighter ship can pass through the canal (why we look at them in combination). The oil evacuated via the pipeline is reloaded at the other end of the pipeline in the Mediterranean. The SUMED pipeline can carry 2.34 mb/d, and theoretically protects the Suez Canal from a total choke hold. Obviosuly this has its limits. The Suez Canal cannot handle the largest oil ships, ultra-large crude carriers (ULCCs).

The strategic importance of the canal and uprisings in the past such as the Arab Spring in Egypt threaten to disrupt oil traffic through the passage. Oil markets are routinely subjected to market rumor and one that rears it's head (usually when the managed money market is very long) is Middle East news. These often come in thin market times where news algorithms do the most damage.

This can give opportunity (or pain) to hedgers and speculators. The key is to understand the true risk, the over extension or whether it is the beginning of something significant.

Arabian Peninsula

In this series on chokepoints we look at the four major pressure paths either side of the Arabian Peninsula. The other three choke points are:

  1. The Bab al-Mandeb Strait
  2. The Straight of Malacca
  3. The Straight of Hormuz

From The Traders Community Research Desk

 

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