Key facts
- Oil prices are on track for a nearly 20% monthly increase for both Brent and WTI benchmarks.
- An incident involving two tankers in the Strait of Hormuz, one catching fire, contributed to market volatility.
- The Bab el-Mandeb Strait has become a second critical chokepoint due to Houthi attacks and blockades.
- Saudi Arabia has rerouted a significant portion of its crude exports away from the Persian Gulf through the East-West pipeline.
- European refiners face potential supply disruptions for diesel and jet fuel if the Bab el-Mandeb Strait is compromised.
Oil prices are on track for a significant monthly gain of nearly 20% for both Brent and West Texas Intermediate benchmarks, despite a recent pullback. The market remains volatile due to ongoing tensions between Iran and the United States, compounded by an incident in the Strait of Hormuz where two oil tankers reportedly turned back after one caught fire, with Iran's IRGC claiming U.S. aircraft were involved.
Standard Chartered highlights that Middle East oil market risk has expanded from the Strait of Hormuz to include the Bab el-Mandeb Strait. Yemen's Houthi militant group imposed a targeted maritime blockade against Saudi Arabia and launched ballistic missiles and drones at two Saudi oil tankers, damaging both vessels and igniting fires. This has prompted multiple Saudi-linked very large crude carriers (VLCCs) to abandon planned transits through the Bab el-Mandeb Strait and reroute around Africa’s Cape of Good Hope, adding up to two weeks to each voyage.
Saudi Arabia had already shifted approximately 70%-75% of its crude exports through the East-West pipeline to the Red Sea port of Yanbu as continued closures and disruptions limited shipments through the Strait of Hormuz. Combined with southbound crude flows from the Suez Canal, roughly 7 million barrels per day were transiting the Bab el-Mandeb Strait before the Houthi attacks, making the waterway one of the world’s most important oil chokepoints.
Disruptions along this corridor ripple through the entire tanker market, increasing war-risk insurance premiums, freight rates, and tightening tanker availability. European refiners are likely to be the most affected if the Bab el-Mandeb Strait is compromised, as they are already contending with supply disruptions from Ukraine’s attacks on Russian refineries. Additional disruption at Bab el-Mandeb would tighten an already constrained middle distillate market by delaying shipments of diesel and jet fuel into Europe. Fully laden VLCCs cannot transit the Suez Canal, forcing cargoes to be transferred or moved across Egypt.