Middle East instability, exacerbated by the U.S. war with Iran, is severely impacting global energy supplies. Yemen, specifically the Houthi forces, has become a focal point of this instability, with their recent capture of Perim island in the Bab al-Mandab strait expanding their control over this critical waterway. Attacks on shipping in the Gulf and Saudi Arabia have compounded concerns.
Drone attacks on Friday extensively damaged a pumping station on Saudi Arabia's key 1,200km (745-mile) East-West pipeline, as shown by satellite images. This pipeline, which was rerouting approximately 4 million barrels per day (4% of global supply) to bypass the Strait of Hormuz, has been shut down. Experts warn that if the pipeline isn't restarted within days, Saudi Arabia could run out of exportable oil stocks, with buyers and traders estimating only five to seven days of supply remaining at Yanbu. This disruption is a major contributor to the current global supply crunch.
The escalating tensions have led to a sharp increase in oil prices. Brent crude rose over 3.4% to $108 per barrel on Sunday, a level not seen since May, and climbed further on Monday. U.S. diesel prices surpassed $6 a gallon for the first time on record, and oil prices gained over 8% last week. The combined pressures from disruptions in the Strait of Hormuz and Bab al-Mandab are projected to keep Brent prices elevated, with forecasts ranging from $95 to $100 a barrel by year-end. Some economists, like Mohamed Shadi, project even higher peaks, potentially reaching $120 if 25% of Bab al-Mandab flows are halted, or up to $229 under a complete shutdown.
Diplomatic efforts to de-escalate the situation have faltered, with a scheduled meeting between Iran and other Gulf powers postponed due to a lack of consensus. The U.S. President Donald Trump has attributed the pipeline attacks to Iran. The increased Houthi activity, despite claims of targeting only Saudi-linked vessels, is adding a substantial risk premium to transit through the Bab el-Mandeb, leading to potential delays or higher freight rates, which would further raise consumer costs.
