Bab al-Mandeb Blockade Threat Puts Global Oil Prices on Edge

Escalating Threats from Houthi MilitiasThe Bab al-Mandeb strait, a crucial route for oil exports in the Middle East, has become the latest battleground as Houthi militias escalate their threats against shipping. In a recent email to shipping companies, the Houthis warned of potential attacks on Saudi ports and any vessels passing through the strait, leading some tankers to turn back.

Impact on Oil PricesA fresh front in the Middle East crisis opened this week, bringing a return of soaring global energy markets. In a matter of days, the price of Brent crude jumped by over 13%, breaching the $100 per barrel mark on Thursday after Yemen’s Houthi militias took aim at a new target: Saudi oil exports via the Bab al-Mandeb strait.

This development comes as the tentative recovery of shipping through the Strait of Hormuz, which had helped oil prices to return to pre-crisis levels of $71 per barrel at the start of the month, grinds to a halt amid the breakdown of the US-Iran ceasefire. Any disruption at Bab al-Mandeb would threaten one of the few remaining routes for Gulf oil exports to circumvent the Hormuz blockade, said Jorge León, head of geopolitical analysis at Rystad Energy.

“If a ceasefire does not materialise and Hormuz remains largely closed while the Houthi threat to Red Sea shipping intensifies, the risk of a significant rebound in oil prices would be substantial,” he warned.

Increased Shipping Costs and Fuel ShortagesThe latest escalation began with the Houthis sending out an email on Monday warning shipping companies not to load and unload at Saudi ports or else face being targeted “in any location” within their reach. The Tehran-allied group, which controls Yemen’s capital and its north-western territory along the Bab al-Mandeb, reiterated this threat the following day.

The trade route through the southern entrance of the Red Sea carried about 4.1 million barrels of crude oil and refined petroleum products each current year, or roughly 5% of the global total compared to the 20% of global oil supplies that once transited the Strait of Hormuz. But in the months since the US-Israeli surprise strikes on Iran at the end of February, volumes through Bab al-Mandeb have surged as the channel has become a vital alternative export route for Saudi Arabia’s vast crude volumes.

Riyadh began to reroute oil via a pipeline from its Abqaiq processing plant, near the Gulf, to the Yanbu export terminal on its west coast, effectively channelling about 75% of its usual exports to the global market via the Red Sea. Rystad Energy vessel-tracking data indicates that approximately 2.5 million barrels a day of these Yanbu volumes are currently moving south through Bab al-Mandeb and on to customers in distant markets such as India and China.

Full avoidance of this waterway, through which a quarter of global container trade passes on its way to and from the Suez canal, requires rerouting around Africa via the Cape of Good Hope. That journey roughly doubles the voyage length and adds an estimated $2 million to $2.5 million in cost for each transit.

Wider Implications for Fuel SuppliesThe pressure on crude oil supplies in the global market is only part of the problem, according to the head of the International Energy Agency, Fatih Birol. “Many refineries have reduced their production of fuel products, including transport fuels such as diesel, to avoid the surging cost of crude,” he warned this week.

Although lower oil demand from refineries has helped to keep a lid on oil market prices, it has created even greater stress on global fuel supplies. Even as Gulf crude exports increased during the US-Iran ceasefire, the production of road fuels remained weak, Birol pointed out: “Refinery activity and product supplies have not picked up as much as crude deliveries, meaning that markets for refined oil products, including diesel and gasoline, are considerably tighter than those for crude.”

Goldman Sachs has said global supplies of diesel have been under pressure.

Source: The Guardian