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Saudi Arabia will be forced to cut its oil production further and Asian buyers will have to wait an extra month for deliveries if Houthi rebels succeed in closing the Bab al-Mandab Strait, one of the last remaining routes carrying Gulf crude to global markets.
Oil prices rose above $98 a barrel on Thursday for the first time since early June after the Iran-backed Houthis said they had attacked two Saudi tankers as they approached the strait.
Bab al-Mandab, which connects the Red Sea with the Gulf of Aden and the Indian Ocean, has become critical to Saudi Arabia’s oil trade to Asia since the Iran war began in February.
Before the conflict, Riyadh exported the bulk of its oil from the port of Ras Tanura, in the kingdom’s oil-rich east, through the Strait of Hormuz. But after Tehran closed that waterway, Saudi Arabia has increasingly used its East-West pipeline to move crude across the kingdom to Yanbu on the Red Sea.
From there, it has been shipping about 2.5mn barrels a day south through Bab al-Mandab to Asia, with China, Japan and South Korea among the largest buyers.
But tankers began reversing course earlier this week after the Houthis declared a maritime embargo on Saudi shipping. The move has opened a new front in the conflict just as renewed fighting between the US and Iran brings traffic through the Strait of Hormuz back to a standstill.
The number of tankers crossing Bab al-Mandab more than halved on Tuesday, according to S&P Global Energy. Several vessels that had loaded at Yanbu turned north towards the Suez Canal, while others slowed or stopped in the Red Sea as shipowners reassessed the risks.
“Extreme pressure” is building across the region, warned Helima Croft, an analyst at RBC Capital Markets, describing the mounting disruption as “everything, everywhere, all at once”. A broader regional war could push oil above its 2008 record of about $146 a barrel, she added.
Energy Aspects consultancy forecasts that if the Houthi embargo holds, Saudi Arabia’s oil production will have to fall below 6mn b/d, roughly 1mn barrels below its March and April levels, and half of its actual capacity.
Saudi Arabia can reroute some Asia-bound cargoes north through the Suez Canal, across the Mediterranean and around Africa. But the diversion would extend journey times by about four weeks, taking a voyage from Yanbu to Asia to more than 50 days.
The additional distance would also sharply increase costs. Industry estimates suggest the extra fuel bill alone could exceed $1.6mn per supertanker.
John Evans, at oil broker PVM, said the delays would leave Asian refiners facing difficult decisions over cargoes that might arrive at the end of September rather than early August. Some could seek replacement supplies from elsewhere, while delayed Saudi barrels might have to be re-offered into the market.
The Suez Canal presents another bottleneck. About 90 per cent of the crude loaded at Yanbu is carried on supertankers that can carry 2mn barrels of oil. But Suez is too shallow for these ships to transit fully laden.
Amrita Sen, founder of Energy Aspects, said they would have to travel half-full, or offload part of their cargo into a pipeline that runs alongside the canal, in order to pass.
