Crude oil markets roiled: Bab al-Mandab threatened amid Israel-Hamas conflict

The Iran-aligned Houthi militant group has launched several airstrikes on commercial vessels in the Red Sea, especially in the Bab al-Mandab Strait – a vital maritime conduit for global trade, situated between Yemen and Djibouti.

PHOTO: Flags of Israel and Palestine. Getty Images

Key routes of transporting Persian Gulf oil and natural gas to Europe and the US encompass the Suez Canal, the Sumed pipeline, and the Bab al-Mandab Strait in the Red Sea.

Oil market analysts speculate that these disruptions could bring global crude oil supplies into jeopardy as the majority of oil companies use these trade lanes to ship their oil tankers and vessels globally.

The situation has compelled several oil majors including BP and Equinor to reroute their vessels around Africa via the Cape of Good Hope and avoid the Red Sea until the aggression ends.

Meanwhile, a war risk premium has supported Brent futures' upward move and pushed its price above the $80/bbl benchmark this week.

“It appears that a cohort of [oil] traders are taking hedging precautions against the tail risk associated with the Strait of Hormuz,” said SPI Asset Management’s managing partner Stephen Innes.

Oil prices might move further up if “heightened risks of instability in the Middle East once again become a significant factor,” he further added.

Key trade routes in the Red Sea

Situated in Egypt, the Suez Canal and the Sumed pipeline create a vital link between the Red Sea and the Mediterranean Sea. The Sumed pipeline has a capacity of 2.5 million b/d and transports crude oil northward through Egypt, according to the US Energy Information Administration (EIA).

Meanwhile, the Bab al-Mandab Strait, situated between the Horn of Africa and the Middle East connects the Red Sea to the Gulf of Aden and the Arabian Sea.

In the first half of 2023, about 12% of globally traded seaborne oil and 8% of liquefied natural gas (LNG) were shipped through these trade lanes, the EIA said.

“Most exports of petroleum and natural gas from the Persian Gulf to Europe and North America pass through multiple chokepoints, including the Suez Canal or the SUMED pipeline and both the Bab el-Mandeb and the Strait of Hormuz,” the EIA added.

US-led military task force boosts shipping confidence in the Red Sea

Operation Prosperity Guardian (OPG), has somewhat boosted confidence for shipping firms in the Red Sea. The OPG aims to protect the critical waterway and counter-attacks on international shipping in the Red Sea.

Danish shipping firm Maersk in its latest advisory stated that the reinforced security measures by the OPG have prompted the firm to restart operations in the Red Sea and Gulf of Aden region. However, it cautioned that the risk remains high, and they may consider diversion plans if the situation deteriorates.

CMA CGM and Evergreen have successfully had two large vessels pass Bab al-Mandeb in the northbound direction. CMA CGM has two more vessels en route from Asia towards Europe which is still far away from reaching the Gulf of Aden, but have not deviated to go south around Africa, Liner consultancy firm Vespucci Maritime’s chief executive Lars Jensen said in a social media post.

Jensen says there have been some hiccups in OPG operations as few countries are unwilling to command under the US.

By Aparupa Mazumder 

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