The war in Yemen: an underestimated risk for oil prices

Saudi Arabia’s six-year offensive in Yemen continues to generate massive human suffering, fears for Middle Eastern stability and attention-grabbing headlines. The civil war is believed to have claims 130,000 lives, most of them civilians, and triggered what the UN describes as the the worst in the world 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 its present form with the collapse of Hadi’s presidency in January 2015 amid pressure from Shia Houthi rebels, backed by Iran, who are the dominant faction in the civil conflict. The Yemen war is now at the center 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 at the start of last year. The civil war has the potential to disrupt global oil supply and cause price spikes at a critical time in the global post-pandemic period economic recovery.

The Houthis, a movement of the Shia Zaydi Muslim minority in northern Yemen, officially known as Ansar Allah, won considerable support from Yemenis, including Sunnis, who were disillusioned with the transitional government from Hadi. After taking over Yemen’s capital, Sanaa, in 2014, militants then attempted to take over the whole country, forcing Hadi to flee in 2015 and alarming Riyadh over a longer southern border. increasingly uncertain flanked by a Shia-ruled country. These events prompted Saudi intervention as the Kingdom sought to consolidate its southern border and prevent Tehran from gaining greater regional influence. While the relationship between Ansar Allah militants and Tehran is far more complex than that of the Houthis as a mere proxy, Yemeni rebels regularly launch attacks on Saudi cities, oil infrastructure and economically vital waterways in the Red Sea. These are mainly carried out using ballistic missiles and Drone strikes with key technology-related weapon components supplied by Iran.

As the conflict in Yemen impedes 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 supplies in oil. The Kingdom is the world’s largest exporter of crude oil and pumps around 10% of the oil consumed in the world. Alarm bells began to ring after the publication of the Washington-based think tank, the Center for Strategic and International Studies data highlighting that Houthi attacks on Saudi Arabia more than doubled in 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 have come at a worse time for a global economy struggling to rebound from the COVID-19 pandemic. The sharp spike in crude oil prices, which sent the international benchmark Brent which has soared more than 60% in the past year, is putting considerable inflationary pressure on economies around the world. This is forcing central banks to roll back stimulus sooner than originally planned, raising fears that the global economic recovery, underway since late 2020, could be derailed. Related: Shell gas trade booms as oil trade slows The potential impact on oil prices of the Houthi attacks on the Saudi oil structure is highlighted by September 14, 2019, to hit on the Abqaiq crude oil processing plant and the nearby Khurais oilfield. Within days of the incident, Brent crude jumped nearly 13%, peaking at over $68 a barrel, before returning to pre-attack prices of around $60 a barrel in early October. A Houthi drone strike earlier in May 2019 on Saudi Aramco’s 5 million barrel-per-day east-west pipeline was also responsible for a momentary mid-month price spike of around $2 a barrel. There are fears that although Riyadh announced in early 2021 that it was seeking a peace deal to end a conflict that has become a quagmire for the Saudis, the war could escalate, indicating the potential for further outbreaks of oil price.

A Houthi of December 2021 projectile attack on the Saudi town of Samtah in the southwestern region of Jazan, which left two dead and seven injured, raised fears of an escalation in hostilities. It was the first cross-border attack in months with casualties. The Saudi-led coalition responded by announcing it was planning a major offensive in Yemen, then launched airstrikes against key Houthi targets in and around the Yemeni capital Sanaa. Attacks by Shiite militants on coalition assets have continued despite Saudi-led airstrikes. Last week the Houthis seized a United Arab Emirates-flagged vessel in the Red Sea, in what the Saudi-led coalition claims to be international waters, saying it was carrying military equipment. In response to this incident and previous drone attacks, new Saudi-led airstrikes hit Houthi targets in Yemen. There was also reports unidentified armed assailants harassing an oil tanker crossing the Red Sea. These incidents indicate that the conflict is escalating despite Riyadh’s claims to seek a peace settlement to end the nearly seven-year war and Washington’s announcement that it will stop supporting its allies involved in the conflict.

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

Source: US EIA.

Bab el-Mandeb is a strategic choke point for global shipping and crude oil supply. The narrow waterway provides access to the Red Sea and the Suez Canal, making it a crucial route for tankers carrying crude oil and liquefied natural gas from the Middle East to European and North American energy markets. The Red Sea is an increasingly important route for oil and liquefied natural gas shipments. Not only because the waterway provides a passage to the Suez Canal which empties into the Mediterranean Sea, creating a shorter passage to European and North American energy markets, but because of Saudi Aramco’s construction of infrastructure energy in western Saudi Arabia to reduce dependence on oil shipments from the Persian Gulf. After a series of Houthi strikes on Saudi oil facilities in the Persian Gulf, Saudi Aramco announced it was expanding the capacity of the East-West pipeline to 7 million barrels per day. By December 2021, the 400,000 barrels per day Jizan Refinery, which took 8 years to build, was finally commissioned and is operating at 50% capacity.

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Riyadh is determined to increase crude oil shipments from Red Sea terminals due to Tehran’s constant threats to close the Strait of Hormuz whenever tensions with Washington boil over. Iran’s proximity to the narrow waterway that runs between it and Oman connecting the Persian Gulf to the Gulf of Oman and the Arabian Sea means Tehran can easily use military force to close the channel and disrupt the navigation. This gives the Iranian government considerable geopolitical leverage because one-fifth of the world’s oil comes from the Persian Gulf and more than 20 million barrels a day, or about 22% of the crude oil consumed in the world, passes through the Strait of Hormuz. As history has demonstrated, Tehran’s slashing of the waterway has triggered major price spikes. As a result, Saudi Aramco continues to expand its processing and shipping facilities on the Red Sea coast. These facilities are supplied by the 5 million barrel per day east-west pipeline that connects the oil fields of eastern Saudi Arabia to the Red Sea coast. This crucial transmission conduit is supported by a network of other pipelines that provide redundancy so that crude oil continues to flow west if the east-west asset is out of service.

These developments underscore the importance of Tehran’s alliance with the Houthis, which is further explained by Yemen’s proximity to the Bab al-Mandeb and Red Sea shipping lanes. This, together with around 6 million barrels of petroleum products per day passing through Bab el-Mandeb, makes it a strategic choke point for European and North American oil and liquefied natural gas shipments. If the strait is impassable, tankers are forced to bypass the Horn of Africa, adding considerable distance, time and cost to their journeys, driving up crude oil and liquefied natural gas prices. . Yemen’s proximity to Bab el-Mandeb gives the Houthis the opportunity to potentially close the channel, which, in addition to being able to disrupt Red Sea shipping lanes, provides them with considerable geopolitical leverage.

Ansar militants have a history of attacking energy infrastructure in western Saudi Arabia, ports like Jeddah and Al-Shuqaiq, population centers and Red Sea shipping lanes. In May 2019, a Houthi drone attack knocked out the East-West pipeline, a crucial link between Saudi oil fields and maritime terminals in the Red Sea, for 10 days. The Houthis have launched armed drone attacks on Saudi Aramco facilities in Jeddah and launched explosive-laden boats at ships in the Red Sea. In early January 2021, militants seized a cargo ship from the United Arab Emirates bound for the Saudi city of Jazan while sailing in the Red Sea. There are signs that Houthi drone strikes against Saudi transport and energy infrastructure as well as shipping in the Red Sea will intensify as militants work to consolidate their grip on Yemen. Yemeni rebels will also respond with more drone and missile attacks on a Saudi and Israeli thrust to preemptively strike Iranian convoys carrying essential weapons as well as parts destined for the Houthis and Hezbollah. If Yemeni militants succeed in disabling important elements of Saudi Aramco’s oil infrastructure oil prices will soar at a time when sharply higher energy prices threaten the global economic recovery.

By Matthew Smith for OIlprice.com

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Felix J. Dixon