Insights on the Suez Canal disaster and how to manage risk when trading

What do you get when you cross fierce winds, a major water crossing and a huge cargo tanker ship? Apparently, a huge trade disaster that is costing $400m an hour to remedy.

Earlier in March, the Ever Given, a 400m supertanker, became wedged inside the Suez Canal, clogging one of the world’s busiest waterways and a vital trade artery. This had disastrous effects on Asian/Mediterranean trade and caused oil prices to spike.

CM Trading founder Daniel Kibel shares his thoughts on managing risk in online trading.

The ship that caused a 400-tanker backlog

As of writing (March 29), the enormous container has been refloated, a critical step to resolving the problem and allowing the 400-ship backlog to flow through the Mediterranean.

Hundreds of container ships were diverted around the African coast, costing companies billions and severely affecting trade.

Kibel says: “It’s a once-in-a-lifetime disaster and shows how valuable the canal truly is. It also highlights how vulnerable the markets are to supply-and-demand shocks caused by natural disasters as well as geopolitical and sociopolitical events and developments.

“About 12% of the world’s goods go through the Suez Canal. The impact is going to be felt by manufacturers waiting for raw materials and may lead to shortages the world over. About 5% of the world’s oil goes through the Suez Canal, so a healthy dose of volatility was expected.”

Impact on oil prices

The blockage of the Suez Canal by the giant container vessel has greatly affected the global energy supply chain, but to what extent is still unclear. Stakeholders and oil producers have even called for revisiting plans for an alternative passage.

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About 600,000 barrels of crude oil flow daily from the Middle East to Europe and beyond via the canal. Fears of supply disruption caused oil prices to rally amid a strengthening dollar.

A day after the incident, West Texas Intermediate and Brent crude oil climbed by more than 6%. However, after the successful refloat attempt of Ever Given, oil prices dipped briefly before reeling back to normal levels.  

Kibel said: “We have seen a small increase in the price of oil, which rallied to a near two-week high at $62 on March 29, but so far oil prices are not hugely affected, or so it seems.

“US indices, which are the go-to benchmarks to determine the fallout, also seem largely unaffected. As we have seen, a year where the world is facing unprecedented economic failings due to the pandemic, the markets have simply shrugged this off to reach almost double the levels they were before the pandemic, so the attention of the markets is clearly elsewhere — for now.”

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Energy sector to see major changes

Kibel says: “The energy sector has and will see major changes. The oil industry has been irreparably damaged by low travel and production demand, to the point that Shell has changed its entire business model; the energy giant has begun decommissioning oil platforms and refineries and focusing on renewable green energy. Though there has been a certain degree of recovery, the sector lost more than 50% in 2020.

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Volatility equals opportunity

“The world is full of millionaires who have not waited on their laurels when things happen. It may sound terrible, but as far as the markets are concerned: the worse the disaster, the higher the profit potential. Of course, it cuts both ways. Higher rewards are typically accompanied by higher exposure to risk, and this is why online trading is not for everyone. However, those with a high tolerance for risk and a solid risk-management strategy have the potential to make millions.

“It’s better to focus on developing a trading strateg

y that you can stick with over the long-term than trying to predict the markets daily and react accordingly. To mitigate risk — diversify your portfolio. CM Trading offers more than 150 different financial assets you can trade.

“My advice for traders going forward — jump straight into the action — don’t let opportunities pass you by. Match your risk level with the trades you want to take. Don’t risk more than you can afford to lose (because in volatile markets you can easily make a fortune, or lose everything, in a matter of minutes), but at the end of the day, those that sit and wait will continue sitting and waiting, says Kibel.

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This article was paid for by CM Trading.