May 05, 2020

Growing Tension in South China Sea Could Impact Oil Shipments

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A gradual relaxation of the stay-at-home orders in the US and other western countries is not the only factor affecting the oil market. For the first time since January, geopolitics and oil-related shipping is a factor, but this time not from Iran, nor threatening marine transit near the Middle East. The increasingly new hotspot for oil tankers could be the South China Sea, in case Chinese or US responses escalate even further.  

Oil markets have witnessed an increased verbal tension between the US and China, amid criticism from the Trump Administration over China's role in the COVID-19 crisis. But this sudden animosity is not solely related to the global pandemic. Tensions with China have gradually escalated during April, due to the South China Sea dispute. Three weeks ago Beijing's government issued Chinese names to around 80 locations in the South China Sea, which claims to be part of its jurisdiction, while other Asian countries have disputed this claim for many decades.

The conflict in itself is not new, but since the beginning of April Chinese vessels have increased its presence in this region and even participated in a conflict with a Vietnamese fishing boat, an event that attracted the attention of the US. This is how just last week the US executed military operations to patrol this territory, which could lead to increasing response from the Chinese marine authorities.

China's claim over the Paracel and Spratly islands, as well as a larger number of marine assets represents the most important geopolitical conflict in the world of the last few years. A conflict with a relative low profile on the Western press, but well entrenched in several nation's sense of sovereignty, including Malaysia, Indonesia, Vietnam and the Philippines. The territory under discussion is claimed to have a significant amount of oil and gas untapped reserves, besides its fishing potential, and of course, its commercial preponderance for marine transit.

Should tensions escalate in this Sea, marine transit to oil consumers like Japan, Korea and China itself could see interruptions, which would impact Brent prices.

  


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