$100 ghost: Oil's worst-case scenario is taking shape

Oil prices briefly rose above $99 a barrel on Tuesday due to attacks on Saudi Arabian energy facilities. The Houthi group launched missile and drone strikes on southern Saudi Arabia, causing fires and disrupting operations at energy sites. The attacks also put pressure on the Red Sea's Bab al-Mandeb chokepoint. This development makes the prospect of oil prices falling below $100 by the end of 2026 increasingly unlikely.

Saudi Arabia, the world's second-largest oil producer, faces a dual threat to its oil exports from both the Strait of Hormuz and the Red Sea. The Strait of Hormuz, which handles over 20 million barrels of oil per day, is currently only handling a fraction of its previous traffic. Meanwhile, Saudi Arabia has diverted more crude towards its Red Sea port of Yanbu, increasing flows through Bab al-Mandeb to an estimated 8.1 million barrels per day.

The Houthi group's blockade of Saudi shipping in July and its attacks on Saudi tankers indicate that the threat to the Red Sea route is more than just a threat to ships at sea. The group's campaign could make shipping insurance prohibitively expensive and force tankers to avoid the Red Sea, preventing Saudi Arabia from using this route.

The current situation is more dangerous than before because both Hormuz and Bab al-Mandeb are under attack simultaneously. Oil market participants are now pricing in a more prolonged disruption to shipping flows. Capital Economics has moved towards an assumption of oil prices around $100 a barrel for the rest of 2026, with energy flows from the Middle East possibly not returning to prewar levels until early 2027.