A new front is opening in the Iran war. Oil faces ‘no way out’
By David Goldman, CNN
(CNN) — The Houthis’ blockade of the Bab al-Mandeb strait couldn’t have come at a worse time for the oil market.
Iran’s proxies in Yemen have threatened to cut off a major bypass of the Strait of Hormuz, through which oil tanker traffic has slowed dramatically in recent days.
So far, the Houthis have been unable or unwilling to enforce the blockade that the militant group announced Tuesday. But the threat alone has persuaded some ships to abandon their plans to exit the Red Sea heading south.
An effective Houthi blockade of Bab al-Mandeb would create a new front in the war with Iran, potentially requiring US military intervention that could then erode US ability to help ships out of the Strait of Hormuz. It also could prevent the Saudis from getting diesel to Europe at a crucial time for the fuel market.
Oil prices have already surged $20 a barrel this month after war broke out again in the Middle East. It could rise more if the workaround no longer works.
Bab al-Mandeb
Like the Strait of Hormuz, Bab al-Mandeb is an exceedingly narrow waterway through which a significant chunk of the global economy transits. It’s just 14 miles wide at its narrowest point between Saudi Arabia and Djibouti, about 40% narrower than Hormuz.
Bab al-Mandeb isn’t as crucial as the Strait of Hormuz, through which 20 million barrels of oil – 20% of the world’s daily supply – typically transited before the war. But Bab al-Mandeb is no slouch: About 6.2 million barrels of oil have been traveling through that strait every day over the past month, according to Kpler.
A significant chunk of that oil would normally have been destined for the Persian Gulf, but Saudi Arabia instead has sent it via its massive East-West pipeline to its major Red Sea port of Yanbu. The Saudis have diverted roughly 4 million to 5 million barrels of oil per day from the Persian Gulf through Yanbu, according to Helima Croft, head of global strategy at RBC Capital Markets.
“If that route becomes inoperable, then the oil supply disruption becomes more serious and we start talking again about a ‘no way out’ situation,” Croft said.
Taking 4 million barrels off the market would be roughly comparable to the amount that China stopped importing during the war – an action oil analysts say has helped keep energy prices relatively low despite the record-smashing oil supply shock.
A full blockade of Bab al-Mandeb could send oil through that price ceiling, at least $5 to $10 a barrel higher – above $100 a barrel, according to Dan Pickering, chief investment officer at Pickering Energy Partners.
The biggest loser(s)
If ships are unable or unwilling to transit the Red Sea heading south, their only path would be north through the Suez Canal. But that would let the ships out in the Mediterranean Sea instead of the Indian Ocean, which isn’t exactly a great path to get Saudi Oil to its biggest customer: Southeast Asia.
About 2.5 million to 3.5 million barrels of Saudi oil heads out of Yanbu each day through the Bab al-Mandeb strait, according to Andy Lipow, president of Lipow Oil Associates. Asian countries, which don’t produce much oil, have been hit hardest by the crude supply crunch during the Iran war.
Saudi Arabia’s ability to get oil out via an alternate path had alleviated a lot of that stress.
Europe also can’t be too happy about the Houthis’ threat. Saudi Arabia ships roughly 230,000 barrels of diesel through the Suez Canal from refineries close to Yemen, putting them at risk of Houthi attack, according to Homayoun Falakshahi, head of crude oil analysis at Kpler.
Diesel has surged more than 40 cents a barrel over the past couple weeks after war broke out again in the Middle East and Ukraine bombarded Russian refineries with drone strikes.
Already working
Houthi militants on Tuesday broadcast to Saudi vessels that they should avoid the Red Sea, and some ships have been taking the message seriously – with good reason: Houthis attacked ships in the area earlier in the war.
Five tankers made U-turns after the announcement, according to Windward Intelligence. A tanker that departed Yanbu carrying oil destined for China Tuesday turned back at the Yemen border under Houthi threats, a risk manager for a Fortune 500 company told CNN. The risk manager requested anonymity to discuss sensitive business interests.
President Donald Trump said in the Oval Office Tuesday that the US military could become involved if the Houthis take more serious action.
“So far, it hasn’t happened. Might happen, but we take care of things,” he said. “We’ve done that with the Houthis before, and we haven’t heard from them in a while since we did what we did originally.”
But the US Navy is busy blockading Iranian ports and is struggling to persuade shipping companies to transit the Strait of Hormuz. Iran struck multiple oil tankers over the past couple days, slowing strait traffic to just a handful of crossings – down from roughly 50 to 70 per day shortly after Iran and the United States signed their Memorandum of Understanding in mid-June.
If America’s military needs to fight the war on a new front, it could stretch its ability to help guide crude through either chokepoint.
CNN’s Davis Winkie contributed to this report
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