The Oil Market’s Backup Plan Is Breaking Down
For decades, the biggest geopolitical risk hanging over the oil market has been the Strait of Hormuz. Before the conflict in Iran began in late February, roughly one-fifth of the world’s petroleum liquids moved through the narrow waterway separating Iran from Oman, making it the most important oil chokepoint in the world. Now that traffic through Hormuz has been severely disrupted, Gulf producers…
The oil market's safety net is crumbling as two critical chokepoints come under attack. The Strait of Hormuz, the world's most important oil chokepoint, has been severely disrupted since the conflict in Iran began in late February. This waterway, separating Iran from Oman, previously carried approximately one-fifth of global petroleum liquids, with Saudi Arabia and the United Arab Emirates relying heavily on it.
However, drone strikes have forced Saudi Arabia to shut down the East-West Pipeline, which transports crude across the Arabian Peninsula to the Red Sea. This pipeline, crucial for bypassing the strait, now faces threats as Houthi forces have advanced along Yemen's Red Sea coast and reached Perim Island, located in the Bab el-Mandeb Strait, the southern entrance to the Red Sea.
The Houthi advance puts them in a stronger position to threaten another critical energy corridor at a time when Saudi Arabia is increasingly dependent on Red Sea exports. The East-West Pipeline is the most important alternative to Hormuz, but it too is under attack. Repair estimates vary, with restoration potentially taking five to six weeks, while partial operations may resume sooner.
However, available inventories at Yanbu, the Red Sea port, may only be sufficient to maintain recent exports for five to seven days. The situation is further complicated by the fact that the primary route around Hormuz now leads towards Bab el-Mandeb, another chokepoint facing escalating security risks due to Iran-aligned Houthi forces.
This creates a dual threat to global oil trade, with Iran demonstrating its ability to disrupt both eastern and western sides of the Arabian Peninsula's energy corridors. While storage can provide temporary relief, the limited buffer available at Yanbu and additional Saudi crude stored at Egyptian ports will eventually become a constraint if repairs take weeks rather than days.
The kingdom's oil production has already dropped significantly during the conflict, with output falling to 6.2 million barrels per day in August from 10.9 million barrels per day in February. As Saudi Arabia relies more on Red Sea exports, the strategic problem arises - Iran has proven its capability to disrupt the primary export route through Hormuz, while Houthi forces can now threaten shipping near Bab el-Mandeb.
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