The Houthis are increasing pressure on the Bab‑el‑Mandeb Strait. What does this mean for the oil market and global trade?

Alexey Belogoryev, Research and Development Director of the Institute for Energy and Finance, commented to the Uzbek publication “Kursiv Uzbekistan” on the prospects for oil exports from Saudi Arabia and the rise in global oil prices amid the simultaneous escalation in the Bab‑el‑Mandeb and Strait of Hormuz.

The situation around the Bab‑el‑Mandeb Strait should be considered in the context of a more comprehensive picture of what is happening in the oil market, in which problems in the Strait of Hormuz currently play a leading role, believes Alexey Belogoryev.

“The current rise in oil prices is primarily due to a significant escalation of the situation in the Strait of Hormuz and a decline in shipping through it because of the blockade tightening by Iran. In July–August, total oil supplies from the Persian Gulf, taking into account all “gray” schemes and workarounds, gradually recovered. If before the start of the war they averaged 20-22 million barrels per day, including petroleum products, then in August they ranged from 15 to 17 million barrels per day. In the first half of September, they fell to approximately 14 million barrels per day, and there remains a risk of further decline,” Belogoryev says.

The uncertainty surrounding the negotiations between the US and Iran on the issue of navigation in the Strait of Hormuz, he said, is putting additional pressure on oil prices, which could rise to $120–130 per barrel by the end of the year.

Belogoryev draws attention to the fact that the market is currently facing a noticeable decline in reserves. According to the IEA, global observed oil reserves decreased by another 95 million barrels in August, and the cumulative decline since February has reached 507 million barrels. The oil refining system is operating at a very high load, and the profitability of refining in the Atlantic Basin has reached record levels amid a sharp rise in diesel fuel prices. Related markets, primarily the market for petroleum products, especially diesel fuel, and natural gas, are also supporting high raw material prices.

If the Bab‑el‑Mandeb Strait is completely blocked, Saudi Arabia can continue to ship oil from the Red Sea to Europe via the Suez Canal and SUMED. The capacity of the latter is 2.5 million barrels per day, and it is already loaded to about 80%. However, the Houthis are trying not only to block the strait for Saudi oil but also to destroy the land‑based and port infrastructure within Saudi Arabia itself.