Key facts
- Standard Chartered believes oil markets must now price risk from two Middle East chokepoints: the Strait of Hormuz and the Bab el-Mandeb Strait.
- Houthi militants attacked two Saudi oil tankers, causing damage and igniting fires.
- The Bab el-Mandeb Strait is a critical waterway for oil transit, with roughly 7 million barrels per day passing through before recent attacks.
- Saudi Arabia has rerouted a significant portion of its crude exports to the Red Sea port of Yanbu due to disruptions.
- European refiners are expected to be most affected by compromised transit through the Bab el-Mandeb Strait, exacerbating existing diesel supply issues.
Oil prices experienced a decline on Friday, reversing earlier gains as reports emerged of Pakistan's efforts to broker a return to U.S.-Iran nuclear negotiations, an initiative strongly supported by China. This development comes amidst ongoing threats to energy security and economic stability stemming from the conflict and the continued closure of the Strait of Hormuz.
Despite the pullback, Standard Chartered suggests that the current dip in oil prices may be short-lived. The bank's analysis indicates that the risk landscape for Middle East oil markets has expanded, now encompassing two critical chokepoints: the Strait of Hormuz and the Bab el-Mandeb Strait.
Earlier in the week, Yemen's Houthi militant group declared a targeted maritime blockade against Saudi Arabia, threatening to prevent Saudi-linked vessels from transiting the vital Bab el-Mandeb Strait. This action was presented as retaliation for Saudi Arabia's decade-long containment of Yemen and a recent airstrike in Sanaa. The threat immediately impacted oil markets, causing several Saudi-linked very large crude carriers (VLCCs) to reroute around Africa's Cape of Good Hope, adding up to two weeks to their voyages.
On Thursday, the Houthis escalated their actions by launching ballistic missiles and drones at two Saudi oil tankers, resulting in damage and onboard fires. This event led to a significant surge in Brent crude prices, which briefly climbed above $100 per barrel, an increase of nearly $20.
Prior to these attacks, Saudi Arabia had already redirected approximately 70%-75% of its crude exports through the East-West pipeline to the Red Sea port of Yanbu, as disruptions limited shipments via the Strait of Hormuz. Standard Chartered estimates that loadings at Yanbu reached about 4.5 million barrels per day. Combined with southbound crude flows from the Suez Canal, an estimated 7 million barrels per day transited the Bab el-Mandeb Strait, underscoring its importance as a global oil chokepoint.
Standard Chartered highlighted that the Red Sea, Suez Canal, and SUMED pipeline constitute the most direct export route between Asia and Europe. However, due to draft restrictions, fully laden VLCCs cannot use the Suez Canal, necessitating cargo transfers to smaller Suezmax tankers or transit via the SUMED pipeline. Disruptions along this corridor have broad market implications, including increased war-risk insurance premiums, higher freight rates, tighter tanker availability, and delayed cargo deliveries. The bank warned that further deterioration in security could compel Saudi Arabia to reduce crude production if alternative export routes cannot compensate for lost capacity.
European refiners are identified as the most vulnerable to disruptions in the Bab el-Mandeb Strait. They are already facing supply challenges due to Ukraine's ongoing attacks on Russian refineries and tanker infrastructure. Additional disruptions at Bab el-Mandeb would further constrict the already tight middle distillate market, delaying diesel and jet fuel shipments to Europe. Diversions around southern Africa would extend voyage times, potentially forcing refiners to seek alternative supplies from the Atlantic Basin, leading to significant shifts in global trade flows and regional price disparities. Clean product tankers are expected to be more severely impacted than VLCC crude tankers, as the latter fleet often utilizes the Cape of Good Hope route even under normal market conditions for long-haul Asia-bound trade.