Oil prices jumped significantly, with Brent crude futures settling up $3.06, or 3.36%, at $94.07 a barrel, their highest in nearly six weeks. U.S. West Texas Intermediate (WTI) crude climbed $2.49, or 2.95%, to $86.83. This surge was primarily driven by increasing supply concerns after Yemeni Houthis claimed missile and drone attacks on two Saudi Arabian oil tankers, the Encelia and the Layla, in the Red Sea. The Saudi state news agency confirmed the Encelia was struck, causing a fire at its bow, though all crew members were reported safe.
The Houthis, also known as Ansar Allah, announced a naval blockade on Saudi Arabia on July 2nd, threatening to target vessels carrying Saudi oil in the Bab el-Mandeb Strait. This development creates a new chokepoint for global oil supplies, intensifying fears already present due to the effective closure of the Strait of Hormuz following the Israel-US war on Iran. About 4.1 billion barrels of crude oil and refined petroleum products passed through Bab el-Mandeb in 2024, representing about 5% of the global total.
Several tankers have already altered their routes in response to the Houthi threats. Five tankers changed course in the Red Sea on July 22nd to avoid the Bab el-Mandeb Strait, and three tankers loaded with Saudi oil for China and India made U-turns on July 21st. The EU's naval force Aspides advised merchant vessels linked to Israeli, US, or Saudi interests to avoid transiting the Red Sea and Gulf of Aden. Saudi Arabia had already re-routed over 70% of its crude exports to its Red Sea port of Yanbu via an east-west pipeline to bypass the Strait of Hormuz, with about four million barrels per day shipped from Yanbu recently.
Analysts warn that this new disruption will lead to higher freight rates and energy prices, which will subsequently increase consumer costs. While the immediate impact on consumers may not be felt for a few weeks, the global energy system's vulnerability has been significantly heightened. If the Bab el-Mandeb Strait is effectively closed, Saudi oil exports to Asia would face much longer routes around the southern tip of Africa, through the Suez Canal, adding weeks to journeys and substantial costs.
Gelber & Associates analysts noted that "Heightened supply disruption fears are mounting as intensified conflict and security risks in the Red Sea force commercial vessels and tankers to alter trade routes." The Brent crude three-month timespread expanded to $9.26 a barrel, its widest since May 22nd, indicating deepening backwardation and signaling tighter near-term supply in the market.
