Oil prices drop as ship stuck in Suez Canal partially refloats

Rising coronavirus cases and new movement curbs are also weighing on oil prices

Brent crude slipped 1.55 per cent to trade at $63.57 per barrel at 10:41am UAE time. AFP

Oil prices fell on Monday as salvage teams partially refloated the massive container ship that has been blocking the Suez Canal and traders weighed the impact of renewed movement restrictions on global demand before a crucial Opec+ meeting next month.

Brent, the international benchmark for more than half of the world's crude, slipped 1.16 per cent to $63.82 per barrel at 11:42am UAE time. West Texas Intermediate, the key gauge for US oil, was down 1.69 per cent at $59.94 per barrel.

Ever Given, the 400 metre, 200,000 tonne ship that has been stuck in the Suez Canal since March 23, was partially refloated and is currently being secured according to maritime services provider Inchcape. However, it is not known when the canal will be fully reopened.

More than 400 vessels including container ships and oil tankers are stuck on either side of the canal as maritime teams work to get the vessel moving again.

Some ships are being rerouted around the Cape of Good Hope, adding about two weeks to journeys and an extra $300,000-$400,000 in fuel costs for larger ships, according to a research note issued on Monday by Abu Dhabi Commercial Bank.

A lengthy blockage of the Suez Canal could lead to a "significant" temporary shortage of a number of goods and commodities across the world, resulting in a sharp rise in prices, ADCB's chief economist Monica Malik said in the note.

"Suez transit volumes account for 5 per cent of global oil trade (equivalent to 5 million bpd), 10 per cent of gas, grains and urea, and 30 per cent of potash."

However, there are alternative methods for shipping crude and given the relatively low level of volumes transiting through the canal, the current demand scenario and inventory levels both in Asia and the West, "it is unlikely that the blockage in the Suez Canal will have a significant impact on crude oil balances [and] prices", financial data company Refinitiv said in a report on Monday.

"The outlook for oil should remain positive" despite a recent sharp decline in prices, Stephen Innes, chief global market strategist at Axi told The National. "Opec+, having maintained production cuts at higher prices last month, seems less likely to open the taps at current levels."

Opec+ countries including Saudi Arabia and Russia will meet next month to discuss the current level of oil output cuts. The group is currently holding back 7.2 million barrels of oil per day to rebalance oil markets. Saudi Arabia, the biggest exporter, is voluntary restraining its production by 1 million bpd.

Renewed movement restrictions in different parts of the world are also weighing on oil prices. Brisbane, Australia’s third most-populous city, is set to enter a three-day lockdown and the Indian state of Maharashtra – which includes the country's commercial hub, Mumbai – is considering another shutdown if a rebound in coronavirus cases isn’t quelled. A night-time curfew is already in place.

"We expect Opec+ to keep oil output broadly steady at the agreed April level amidst a new wave of Covid cases and related restrictions in Europe and India," Ms Malik said.

"Rising demand-side concerns and increased oil price volatility since the last meeting are also likely to encourage Opec+ to adopt a cautious and restrictive approach, in our view. Saudi Arabia is expected to maintain its voluntary and unilateral 1 million bpd production cut for May and any reversal is likely to be gradual."