Oil prices gave up earlier gains on Friday after reports that Pakistan is trying to broker a return to U.S.-Iran nuclear negotiations. China is strongly backing the effort as the conflict and the closure of the Strait of Hormuz continue to threaten its energy security and weigh on its economy.
Brent crude for September delivery fell 4.4% to trade at $96.36 per barrel at 1.35 pm ET while WTI crude for September delivery was down 3.6% to change hands at $88.86/bbl.
However, Standard Chartered says the latest pullback may prove temporary as Middle East oil market risk has expanded from one strategic chokepoint to two.
On Monday, Yemen’s Houthi militant group imposed a targeted maritime blockade against Saudi Arabia, threatening to enforce it by blocking Saudi-linked vessels from transiting the vital Bab el-Mandeb Strait. The group claimed the blockade was a direct retaliation for a decade-long Saudi containment of Yemen as well as a recent Saudi-backed airstrike targeting Sanaa International Airport.
The threat immediately rattled oil markets, prompting multiple Saudi-linked very large crude carriers (VLCCs) to abandon planned transits through the Bab el-Mandeb Strait and instead reroute around Africa’s Cape of Good Hope, adding up to two weeks to each voyage. Two days later, the Houthis followed through. The group launched ballistic missiles and drones at two Saudi oil tankers on Thursday, damaging both vessels and igniting fires onboard. Brent crude surged nearly $20 per barrel, briefly climbing above $100.
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The attacks came after Saudi Arabia had already shifted roughly 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.
Standard Chartered estimates that loadings at Yanbu had climbed to approximately 4.5 million barrels per day as Riyadh redirected exports away from the Arabian Gulf. 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.
As Standard Chartered notes, the Red Sea, Suez Canal and SUMED pipeline form the shortest export corridor between Asia and Europe. However, fully laden very large crude carriers (VLCCs) cannot transit the Suez Canal because of draft restrictions, forcing cargoes to be transferred to smaller Suezmax tankers or moved across Egypt through the SUMED pipeline before being reloaded in the Mediterranean.
