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The Yemen War: An Underestimated Risk For Oil Prices

Saudi Arabia’s six-year-long offensive in Yemen continues to generate considerable human suffering, fears over Middle East stability, and attention-grabbing headlines. The civil war is estimated to have claimed over 130,000 lives, most of whom were civilians, and sparked what the UN describes as the world’s worst humanitarian crisis. The conflict has its roots in the 2011 Arab Spring, which saw the ousting of former strongman Ali Abdullah Saleh and the appointment of Sunni politician Abdrabbuh Mansour Hadi as president in 2012. The Civil War, which began in September 2014, took on its current shape with the collapse of Hadi’s presidency in January 2015 amid pressure from Shiite Houthi rebels, backed by Iran, who are the dominant faction in the civil conflict. Yemen’s war is now the focal point of the bitter rivalry between the Kingdom of Saudi Arabia and Iran for dominance in the Middle East. There are signs the conflict is escalating despite Saudi Arabia announcing plans for a ceasefire early last year. The civil war has the potential to disrupt global oil supplies and cause price spikes at a critical moment in the global post-pandemic economic recovery.

The Houthis, a Zaydi Shiite Muslim minority movement from northern Yemen officially known as Ansar Allah, gained considerable support from Yemeni’s, including Sunnis, who were disillusioned with Hadi’s transitional government. After taking control of Yemen’s capital Sanaa in 2014, the militants then attempted to seize control of the entire country forcing Hadi to flee in 2015 and alarming Riyadh about an increasingly insecure southern border flanked by a Shiite ruled country. Those events prompted Saudi intervention as the Kingdom sought to shore up its southern border and prevent Teheran from gaining greater regional influence. While the relationship between the Ansar Allah militants and Teheran is far more complex than that of the Houthis as a simple proxy, the Yemeni rebels regularly launch attacks on Saudi cities, petroleum infrastructure, and economically vital Red Sea shipping lanes. These are predominantly conducted using ballistic missiles and drone strikes with the key technology-related weapon components provided by Iran.

While Yemen’s conflict is preventing the development of the country’s 3 billion barrels of oil reserves and 17 trillion cubic feet of natural gas, Houthi strikes on Saudi energy infrastructure pose a significant threat to global oil supplies. The Kingdom is the world’s single largest exporter of crude oil and pumps around 10% of the petroleum consumed globally. Alarm bells started ringing after Washington-based think tank Center for Strategic and International Studies released data highlighting that Houthi attacks upon Saudi Arabia more than doubled for the first nine months of 2021 compared to the same period a year earlier. The threat posed by the sharp increase in Houthi attacks could not come at a worse time for a world economy struggling to bounce back from the COVID-19 pandemic. The significant spike in crude oil prices, which has sent the international benchmark Brent soaring by more than 60% over the last year, is placing considerable inflationary pressures on economies around the world. This is forcing central banks to wind back stimulus earlier than originally anticipated sparking fears that the world economic recovery, underway since late 2020, will be derailed.

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The potential impact on oil prices of Houthi attacks on Saudi oil structure is underscored by the September 14th, 2019, strike on the Abqaiq crude processing plant and nearby Khurais oil field. Within days of that incident, Brent surged by nearly 13%, peaking at over $68 per barrel, before returning to pre-attack pricing, of around $60 a barrel, at the start of October. An earlier May 2019 Houthi drone strike on the Saudi Aramco 5 million barrel per day East-West pipeline was also responsible for a momentary mid-month price spike of around $2 per barrel. There are fears that despite Riyadh announcing in early 2021 that it was looking for a peace deal to end a conflict that has become a quagmire for the Saudi’s, the war will escalate, pointing to the potential for further oil price spikes.

A December 2021 Houthi projectile attack on the Saudi town Samtah in the southwestern Jazan region, which left two dead and seven wounded, triggered fears of an escalation in hostilities. It was the first cross-border attack in months leading to casualties. The Saudi-led coalition responded by announcing it was planning a major offensive in Yemen and then launched airstrikes against key Houthi targets in and around the Yemeni capital Sanaa. Attacks by the Shiite militants on coalition assets continued despite the Saudi-led airstrikes. Last week the Houthis seized a UAE flagged vessel in the Red Sea, in what the Saudi-led coalition claims were international waters, declaring it was carrying military materials. In response to that incident and earlier drone attacks, further Saudi-led airstrikes hit Houthi targets in Yemen. There were also reports of unidentified armed attackers harassing an oil tanker traversing the Red Sea. Those incidents point to the conflict escalating despite Riyadh’s claims of seeking a peace settlement to bring the nearly seven-year war to an end and Washington announcing it would cease supporting its allies involved in the conflict.

While the Houthis are not a true Iranian proxy like Lebanese militant group Hezbollah, they are an important regional ally for Teheran. Yemen’s proximity to vital Red Sea shipping lanes, the Bab el-Mandeb Strait connecting the Gulf of Aden to the Red Sea and western Saudi Arabia allows the Houthis to readily attack Saudi infrastructure, transport nodes, and population centers. 

Source: U.S. EIA

The Bab el-Mandeb is a strategic chokepoint for global shipping and crude oil supplies. The narrow waterway provides access to the Red Sea and the Suez Canal, making it a crucial route for tankers shipping crude oil and liquified natural gas from the Middle East to European as well as North American energy markets. The Red Sea is increasingly an important route for petroleum and liquified natural gas shipments. Not only because the waterway provides passage to the Suez Canal which flows into the Mediterranean Sea, creating a shorter passage to European and North American energy markets, but due to Saudi Aramco building out energy infrastructure in western Saudi Arabia to reduce dependence on shipping petroleum from the Persian Gulf. After a series of Houthi strikes on Saudi Persian Gulf oil facilities, Saudi Aramco announced it was expanding the East-West pipeline capacity to 7 million barrels per day. By December 2021 the 400,000 barrel per day Jizan refinery, which took 8 years to build, finally came online and is operating at 50% of capacity.

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Riyadh is determined to expand crude oil shipments from Red Sea terminals because of Teheran’s constant threats to close the Strait of Hormuz whenever tensions with Washington boil over. Iran’s proximity to the narrow waterway which flows between it and Oman connecting the Persian Gulf to the Gulf of Oman and the Arabian Sea means Teheran can easily use military force to close the channel and disrupt shipping. That endows Iran’s government with considerable geopolitical leverage because a fifth of the world’s petroleum originates in the Persian Gulf and over 20 million barrels per day, or around 22% of crude oil consumed globally, flows through the Strait of Hormuz. As history has demonstrated Teheran’s saber-rattling over the waterway has triggered significant prices spikes. As a result, Saudi Aramco continues ramping up its processing and shipping facilities on the Red Sea coast. Those facilities are supplied by the 5 million barrel per day East-West pipeline which connects Saudi Arabia’s eastern oilfields to the Red Sea coast. That crucial transport conduit is supported by a network of other pipelines which provide redundancy so that crude oil keeps flowing westward if the East-West asset is out of service.

Those developments underscore the importance of Teheran’s alliance with the Houthis which is further explained by Yemen’s proximity to the Bab el-Mandeb and Red Sea shipping lanes. That, coupled with around 6 million barrels daily of petroleum products passing through the Bab el-Mandeb, makes it a strategic chokepoint for European and North American oil and liquefied natural gas shipments. If the strait is impassable, tankers are forced to journey around the Horn of Africa adding considerable distance, time, and cost to their voyages leading to higher crude oil and liquified natural gas prices. Yemen’s nearness to the Bab el-Mandeb gives the Houthis the ability to potentially close the channel which along with being able to disrupt Red Sea shipping lanes provides them with considerable geopolitical leverage.

The Ansar militants have a history of attacking western Saudi energy infrastructure, ports including Jeddah and Al-Shuqaiq, population centers, and Red Sea shipping lanes. In May 2019, a Houthi drone attack knocked the East-West pipeline, a crucial link between Saudi oilfields and the Red Sea shipping terminals, out of service for 10 days. The Houthis have launched armed drone attacks against Saudi Aramco facilities in Jeddah and launched explosive-laden boats against Red Sea shipping. In early January 2021, the militants seized a United Araba Emirates cargo ship bound for the Saudi city of Jazan while it was sailing in the Red Sea. There are signs Houthi drone strikes against Saudi transport and energy infrastructure as well as Red Sea shipping will escalate as the militants push to consolidate their hold on Yemen. The Yemeni rebels will also respond with more drone as well as missile attacks to a Saudi and Israeli push to preemptively strike Iranian convoys carrying key weaponry as well as parts to the Houthis and Hezbollah. If the Yemeni militants successfully disable significant elements of Saudi Aramco’s petroleum infrastructure oil prices will spike at a time when substantially higher energy prices are threatening the global economic recovery.

By Matthew Smith for OIlprice.com

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