ES #124: Easing Trade Disruptions vs. Tariffs

Energy Shots #124:

President Trump’s tariff threats and intensifying negotiations between the US and major trade partners have led to a prevailing market narrative that inflation and borrowing costs have considerable upside skew in 2025.

• The latest rate cut probabilities derived from the markets’ Fed Fund futures positioning shows >99% aggregated odds for just two 25 bps cuts by the Fed’s meeting on December 10, 2025.

However, a closer look at global trade patterns in 2024 provides a counterargument to the markets’ consensus inflation expectations.

• The inflationary effects of US tariffs must contend with the disinflationary effects of 1) a successful Israel-Hamas ceasefire that restores traffic through the Suez Canal, 2) eased restrictions and restored vessel traffic through the Panama Canal, and 3) early-January’s successful ILA-USMX labor agreement negotiations that ended disruption threats at major US ports.

Quantifying 2024 Trade Disruptions

As shown below, global supply chains faced compounded disruptions that drastically altered the flow of energy, raw materials, and finished goods between major economies in the Eastern and Western hemispheres.

Trade routes like the Suez Canal, which handled approximately 8% of global energy trade in 2019, saw its annual commercial vessel traffic drop by roughly 55% from 2023 as shipping firms rerouted away from Houthi attacks in the Red Sea.

Houthi-related disruptions to traffic through the Suez Canal were simultaneously amplified by drought-related impacts to traffic through the Panama Canal between mid-2023 and mid-2024.

• Panama’s Gatun Lake fell to record-low levels in the second-half of 2023, forcing the Panama Canal Authority to implement restrictions that cut last year’s total traffic through the Panama Canal by 19% Y/Y.

With the two primary trade routes between Eastern and Western hemispheres disrupted, the lion’s share of East-West energy, raw materials, and finished goods were re-routed around Africa’s Cape of Good Hope—leading to a 63% Y/Y increase in annual commercial vessel traffic on the circuitous path in 2024.

The indirect effects of these disruptions are likely as material as the direct impacts, making 2024 an unsuitable ‘baseline’ for market participants’ inflation forecasts.

While the inflation risks from tariffs or a prolonged trade war should not be ignored, the following events could materially reduce global supply chain costs and lead to a downside surprise to the markets’ inflation/interest rate expectations:

• Houthi attacks on Red Sea vessels have eased alongside Israel-Hamas ceasefire negotiations. Houthi leadership has vocalized that the group will not attack non-Israeli ships as negotiations proceed and will cease attacks upon the successful completion of Israel-Hamas negotiations. The restoration of trade flows through the Suez Canal would swiftly and materially reduce transportation costs for energy, raw materials, and finished goods between the Eastern and Western hemispheres.

• The Panama Canal Authority has removed transit restrictions on vessels through the Panama Canal as water levels in the artificial Gatun Lake have recovered to pre-drought norms. Fewer transit restrictions will similarly reduce the transportation costs for US energy exports to Asia and US goods imports from Asia.

• Late-2024 negotiations between the International Longshoremen’s Association (ILA) and the US Maritime Alliance of shipping firms were expected to culminate in an extended walkout in early 2025. However, strike risks ended with the ILA-USMX agreement struck in January, immediately reducing risk-related tailwinds for containerized freight rates (-20% YTD).

See you next Sunday.

ES.

This commentary contains our views and opinions and is based on information from sources we believe are reliable. This commentary is for informational purposes, should not be considered investment advice, and is not intended as an offer or solicitation concerning the purchase and sale of commodity interests or to serve as the basis for one to decide to execute derivatives or other transactions. This commentary is intended for Mobius clients only and is not considered promotional material.