One More Challenge to an Already Difficult Oil Market Supply Crunch
On July 20, the Houthis announced a maritime embargo targeting Saudi Arabia and vessels transiting the Bab al-Mandeb Strait. One day later, reports of two Saudi ships being attacked by the Houthis are circulating media outlets, underpinning an uptick on Brent prices this week.
If this additional blockade is effectively implemented for several weeks, it would dismantle the energy sector’s main safety mechanism following the disruption of the Strait of Hormuz.
Over the last four months, Saudi Arabia has relied heavily on its East-West pipeline to supply volume to international markets amid the blockade of the Persian Gulf’s primary export route. This pipeline transfers crude to the western port of Yanbu, where export shipments surged to an average of 3.5 million barrels per day (MMb/d) since the conflict began.
While Bab al-Mandeb has never been capable of replacing the roughly 20 MMb/d of oil (crude and refined products) that normally transit Hormuz, it has become an essential corridor for maintaining trade flows during the current global supply crunch. Any restrictions would further reduce the market’s already limited logistical flexibility.
There are different destinations for vessels loading crude or products at Yanbu, so a blockade at Al-Mandeb would not completely interrupt this volume. Some ships were bound for Europe and could travel west to Ain Sukhna, then through Egypt’s SUMED pipeline network towards the Mediterranean. However, Asia-bound tankers, typically accounting for more than 70% of Yanbu’s total output, must pass south through Bab al-Mandeb to reach Asian destinations. This means Japan, Korea, mainland China, India and neighboring importers stand to be the biggest losers of this additional maritime bottleneck amid the latest escalation between the US and Iran.
Closing this southern passage would force tankers supplying major Asian importers to detour entirely around the African continent via the Cape of Good Hope, adding 10 to 14 days to each voyage. Longer transit times would tie up tanker availability, driving up maritime freight rates and risk premiums.
If the Houthis fully implement this threat, the incremental impact on top of the Hormuz disruption could affect around 3.2 MMb/d of flows going to Asia (crude and products). This includes around 2.6 MMb/d of crude and refined product exports from Yanbu, plus 200,000 b/d of crude from Sudan, and about 0.4 MMb/d of refined product exports (mainly naphtha and fuel oil) from European and African refineries that normally reach Asia using the Red Sea and the Bab al-Mandeb route.
All in all, this is an important development that threatens one of the market’s last remaining safety valves. With Hormuz already impaired and Russian refined product exports constrained by refinery disruptions and export restrictions, the global oil market is now left with fewer options to reroute supply, making future geopolitical and logistical disruptions increasingly difficult and more expensive to manage.
By Jaime Brito, Terine Ooi