Oil: Red Sea route risks and price outlook – MUFG

MUFG’s Michael Wan notes that disruptions in the Strait of Hormuz have shifted more Middle East Oil flows toward the Red Sea and Bab el-Mandeb, increasing vulnerability to regional conflict. While Houthi threats and potential rerouting via Suez and Cape of Good Hope could lift transport costs, MUFG still expects Oil prices to stay below earlier conflict highs if a resolution eventually emerges.

Red Sea vulnerabilities and price risks

"In particular, the Houthis said they will impose a maritime blockade on Saudi Arabia in response to what they say is Saudi Arabia’s siege of the Yemeni capital. This led to the Saudi Arabia led military coalition in Yemen to begin implementing operational measures to protect ships in the Bab el-Mandeb Strait at the southern end of the Red Sea."

"A wholesale disruption of the Strait may also be an alternative option, and this may lead some tanker and cargo traffic to take a longer route through the Suez Canal and the Cape of Good Hope which could ultimately lead to higher container freight and transport costs."

"For context, with the ongoing disruptions in the Strait of Hormuz, oil flows have been increasingly reliant on the Red Sea and the Bab el-Mandeb Strait. In particular through the East-West pipeline roughly 4mn barrels per day of oil from Saudi Arabia is now shipped through the Red Sea and as such any effective disruption to oil flows there could be quite impactful for Asian countries dependent on Middle East oil for supplies."

"In practice, we think even if there were disruptions it is unlikely to be sustained given the lack of capability right now by the Houthis to do so and also differentiate which are Saudi linked ships or not."

"Latest indications are that there continues to be talks and discussions happening in the background including through mediators and with the US mid-terms coming up coupled with lack of munitions by the US military oil prices may not revisit the earlier highs that we saw earlier during the conflict."