Will The Red Sea Blockade Reignite Inflation Fears?

Houthi rebels are attacking Red Sea vessels and greatly limiting traffic in one of the world’s most critical shipping lanes. Four of the world’s five largest container shipping companies, accounting for slightly over half of the world’s container traffic, have suspended transit through the Red Sea. As the graphic below shows, the alternative route, around South Africa, adds about 40% to the distance and, therefore, more time and energy expenses. Over 10% of all oil and 20% of container traffic are shipped through the Red Sea.

If the Houthi rebels continue to wreak havoc on this vital shipping lane, might it rekindle inflation? ISI Shipping Analyst Jon Chapell via Freight Waves thinks it is possible – “In a worst-case scenario, in which Red Sea transits for all ship types are heavily curtailed, we could see freight prices go up multiples — think five to 10 times. These costs would be passed through to the consumers and shippers, and supply chain bottlenecks would re-emerge as the greater distances around Africa would tie up extreme amounts of shipping capacity.” However, he notes a joint naval task force to escort ships could restore confidence, allowing vessels to use the Red Sea again.

We think the blockade may pressure shipping costs higher for some goods, but alternative routes should limit shortages even in the event of a complete shutdown. Further, the U.S. is much less reliant on the Red Sea than Europe and other nations. Per Moody’s, “(U.S.) Shoppers shouldn’t expect the price of the things they buy to rise much, if at all, because of the shipping chaos.“ Source Lance Roberts


Philadelphia Fed

Despite a recent bout of good economic data, The December Philadelphia Fed survey was -10.5, which was worse than the expected -4.0. The survey has been negative in 14 of the last 16 months, with just one positive print in the last year. Philadelphia is the sixth largest city and a significant production and transportation hub. As we see in this survey and other manufacturing surveys, the manufacturing sectors continue to struggle despite what appears to be a robust economy.

The graphic below shows expectations for the current quarter are weak. Only 20.6% of the firms surveyed see increased production this quarter. 35% see no change, and 44% think it will decline. Source Lance Roberts


Big oil enters 2024 strengthened by U.S. industry consolidation
The U.S. oil and gas industry entered 2024 with strengthened positions due to extensive consolidation and acquisition activities aimed at securing lower-cost reserves and preparing for anticipated future industry changes. The industry saw a $250 billion buying spree in 2023, with major players Exxon Mobil, Chevron Corp, and Occidental Petroleum making acquisitions worth a total of $135 billion. Specifically, these companies are set to control about 58% of future production in the country's largest shale-oil field, the Permian Basin in west Texas and New Mexico. With prevailing trends indicating more active consolidation, oilfield service providers and pipeline operators could face an era of fewer customers exerting more control over pricing. This development comes alongside expectations of steady global oil prices in 2024, predicting it to trade between $70 and $90 per barrel. Source Yahoo Finance

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