Houthi Red Sea Blockade Could Shatter Hopes for Lower Oil Prices

Renewed Houthi blockade of Saudi Red Sea ports threatens up to 4 million bpd of redirected Saudi crude exports, adding fresh supply risks as the Strait of Hormuz remains effectively disruptedThe latest reignition of hostilities between the United States and Iran led to a spike in oil prices that, contrary to some observers’ expectations proved to be temporary. After jumping, prices once again moved lower, driven by hope for peace. Yet the recent announcement by Yemen’s Houthis that they would blockade Saudi Arabia’s Red Sea ports may change that.The Houthis declared what they termed a naval blockade on neighbor Saudi Arabia on Monday, expanding the war and threatening the flow of over 4 million barrels daily in Saudi crude that Riyadh redirected from the Strait of Hormuz to the Red Sea. That redirection played a significant part in quelling trader fears of an oil shortage—which is exactly what makes the potential success of the Houthi blockade so bullish for prices.“After oil prices moved higher on escalating U.S.-Iran tensions last week and the resulting slowdown in Hormuz transits, traders are watching for catalysts that would justify a further rally,” Energy Aspects co-founder and executive director Richard Bronze said this week, as quoted by Reuters. “The Houthis resuming maritime attacks and effectively shutting the Bab el-Mandeb would certainly qualify,” Bronze added. ING’s commodity analysis team, meanwhile, reported that several tankers have already changed course to avoid passing through the Bab el-Mandeb Strait to avoid possible Houthi attacks. “This would force tankers to enter and exit the Red Sea via the Suez Canal, adding significant time and expense to voyages to Asia,” Warren Patterson and Ewa Manthey wrote.This will inevitably lead to higher oil prices—and prices are already quite high, when viewed in a broader context. Saxo Bank reported last week, citing Bloomberg data, that crude oil had gone up by as much as 65% in the year to date. Over the 12 months to July, Brent crude and West Texas Intermediate are both up by over 50%. Prices, therefore, are pretty high compared to a year ago even if they are not in three-digit land. But if the Houthi blockade succeeds in redirecting traffic away from Bab el-Mandeb, they could still move higher—and stay there as the physical market tightens further,Reuters noted in a recent report that some 7 million barrels daily and more pass through the Bab el-Mandeb Strait. Compared to pre-war daily traffic of around 20 million barrels for the Strait of Hormuz, this is not a lot. Yet this is no pre-war time, and with Hormuz shut down again, Bab el-Mandeb has become a much more significant gateway for Middle Eastern oil to the world, and especially Asia. If the Red Sea chokepoint gets shut down, that hope for a U.S.-Iran peace that has been pressuring oil would be put to a major test.“The impact is going to be massive in the first month,” Kpler commodity research director Matt Smith said this week, as quoted by Reuters. “The biggest impact is going to be on Saudi flows.”“If they really stop and severely hinder those barrels through the Red Sea, that is going to have an impact on oil prices as well as refined product prices,” Stratas Advisors president John Paisie told the publication. “It undermines the whole global economy. At some point, you could have a global recession.”The fact that the prospect of a global recession is once again on the table after just weeks ago everyone in analysis seemed convinced a final peace deal is only a matter of time demonstrates how unstable the situation is in the Middle East. Because of that instability, oil price volatility may yet grow as traders realize hopes are one thing, but the physical reality is quite another, and needs a lot of oil that may not be as readily available as previously assumed, not least because it’s not only Middle Eastern supply that has been disrupted.“The disruptions facing the market don’t end in the Middle East,” ING’s Patterson and Manthey wrote in a note today. “In the Black Sea, Russia’s CPC terminal has stopped receiving oil from Kazakhstan, with loadings suspended following ongoing attacks on tankers. The longer the suspension drags on, the greater the likelihood that Kazakhstan will be forced to curb upstream production.” Kazakhstan shipped 1.7 million barrels of crude daily via the CPC. On top of the potential choking of 3-4 million barrels of Saudi oil by the Houthis, this is quite a lot of unavailable oil.The latest supply squeeze could arguably have come at a worse time but not by much. With governments having already released several hundred million barrels of crude from inventory to keep a lid on retail fuel prices, storage levels are down—in some cases to critical levels. These need to be replenished, but with tighter instead of more abundant supply, this is going to be difficult.By Irina Slav for Oilprice.comMore Top Reads From Oilprice.comOil Jumps Nearly 4% as Houthis Threaten Red Sea BlockadePakistan Scrambles for Oil Alternatives as Hormuz, Red Sea Risks MountIran War Escalation Threatens Global Fuel Supply Recovery