Bianca Botes, Managing Director at Citadel Global
The Iran conflict began as a United States (US)-Israel military operation against a single state actor on 28 February. Nearly five months later it has acquired a regional architecture that makes resolution considerably more complicated. This week the Houthis, operating from Yemen, declared a naval blockade on Saudi Arabia and followed through on 23 July by striking two Saudi oil tankers – the Encelia and the Layla – with drones and missiles in the Red Sea. Saudi state media confirmed the Encelia was hit, causing a fire at the bow. In the same 24-hour window, the US completed its 12th consecutive night of strikes on Iran, Iran retaliated by hitting US military positions in Jordan and Kuwait and regional mediators presented Washington and Tehran with a proposal for a 10-day ceasefire.
The new strategic player in the war
The Houthi move is deemed tactical, because it serves Iran’s interests well as it opens a second chokepoint without Iran taking direct responsibility for it. While the Strait of Hormuz handles roughly 20% of global seaborne oil, the Strait of Bab el-Mandeb – which the Houthis now threaten – connects the Red Sea to the Gulf of Aden and carries a significant share of Saudi Arabia’s crude exports to Asia. With Hormuz all but closed since the start of the war, Saudi Arabia has been moving oil through the Red Sea to compensate for the Hormuz route’s disruption. That alternative is now under attack. Five tankers changed course to avoid Bab el-Mandeb on 23 July, while the day before, three laden with Saudi crude bound for China and India were turned back, showing that the scope of the supply disruption has widened materially.
The oil price bounces back
Brent crude hit above $100/barrel yesterday, its highest level since late May and gained 4.6% on the tanker strike news alone. That puts Brent on course for a monthly gain of 30%, the third largest jump in a decade. West Texas Intermediate followed at $92/barrel. The possibility of mediation, however, pulled prices back, with Brent settling near $90-to-$91/barrel by 22 July’s close. The market is trying to simultaneously price in a physical disruption that is real and widening and a diplomatic possibility that is fragile. That combination is producing seesaw price action that makes hedging difficult and forward planning harder.
Is a new ceasefire an option?
The new ceasefire proposal deserves scrutiny. US Secretary of State, Marco Rubio, said publicly this week that Iran is not ready to make a deal. The gap between the diplomatic track and the military track is wide and a 10-day pause in the conflict will resolve none of the structural disagreements that produced the conflict.
The Houthi dimension complicates any ceasefire further – a US-Iran agreement does not bind the Houthis, who have their own demands. Saudi Arabia has lifted what it describes as a blockade on Houthi-controlled ports and airports, which is entirely separate from the US-Iran negotiation. The naval blockade on Saudi Arabia was declared days after the Yemeni government bombed the airport in the Yemeni capital, Sanaa, to stop an Iranian plane from landing. Multiple actors, multiple objectives and a bilateral US-Iran ceasefire leaves a number of risks in place.
The three risks
The first risk is an escalation targeting Saudi production infrastructure rather than tankers. Houthi drone and missile capability has improved materially since its Abqaiq strike in 2019, where drone and cruise missiles were launched at the critical Saudi Arabian energy hub. If that capability is directed at Saudi oil facilities, the shock moves from a shipping disruption to a production disruption, which is a different order of magnitude entirely. Independent energy research and data analytics company, Rystad Energy, has been explicit: if Hormuz remains largely closed and the Houthi Red Sea threat intensifies simultaneously, oil prices re-testing and exceeding prior highs is a real scenario.
The second risk is state actor widening. Iran has now struck US military positions in Jordan and Kuwait, both US allies with treaty obligations and active US basing. Those strikes raise the possibility of direct involvement from countries that have so far remained outside the conflict, or of US escalation beyond Iranian territory.
The third risk is the ceasefire itself. A 10-day pause that does not resolve underlying tensions is not stability. Rather it is a window in which all parties rearm and reposition. The 2019 Abqaiq attack and the subsequent non-response established that aggression against Saudi infrastructure was tolerable. The current conflict is testing different limits. If the ceasefire holds and negotiations resume, the market will price-in relief quickly and possibly excessively. If it fails – and the history of ceasefires in this region argues for caution – the next escalation will kick-off from a higher baseline of disruption than the previous one.
ENDS
