What Does the Red Sea Crisis Mean for Oil Prices?

Why It Matters: A vital route for energy is threatened

The Suez Canal and the Bab el-Mandeb Strait at either end of the Red Sea are major routes for energy shipping. Tankers coming from Persian Gulf countries like Iraq and Saudi Arabia travel through the Red Sea to reach Europe. These vessels have become even more important recently, because the war in Ukraine and sanctions against Russia have made Europe more dependent on oil and refined products like diesel and gasoline from the Middle East and Asia. Russian oil flows southward to India and other Asian markets have also surged.

Goldman Sachs estimates that around seven million barrels a day of oil and products, a sizable volume, flows through the Bab el-Mandeb Strait. The Suez Canal is also a crucial route for liquefied natural gas shipments from the United States to Asia, an increasingly important route.

The main alternative to the Red Sea, a journey around Africa via the Cape of Good Hope, adds about two weeks to trips, increasing freight and insurance rates and raising the price of crude oil by up to $4 a barrel, Goldman estimates.

The Numbers: Why haven’t oil prices risen more?

The situation in the Red Sea seems more likely to cause the rerouting and delay of oil supplies than the shutdown of wells. More oil, for instance, could travel to Europe from ports on the Red Sea in western Saudi Arabia, bypassing the need to cross the Bab el-Mandeb Strait.

In addition, analysts say the Houthis seem unlikely to intentionally attack ships connected to countries they view as politically friendly, including those from Russia and Qatar.

Until recently, oil prices were on a downward trajectory, as traders calculated that there was plenty of supply in the world. The United States is pumping oil at record levels and Europe has loaded up its natural gas storage facilities for the winter. At the same time, analysts say, oil demand growth in the coming months may be weak because of economic problems in China and a warm early winter.

Traders have been burned betting that geopolitical events like Russia’s invasion of Ukraine would disrupt oil flows; they may not want to risk money on such wagers at this point.

What Happens Next: Efforts to reopen the route could reduce pressure on prices

On Tuesday, the United States explained what officials said would be a stepped-up military presence in the Red Sea, with participation of other countries like Britain and Bahrain. Whether it will be enough to deter the Houthis remains to be seen. So far, the effort does not seem to be adding much to existing firepower, analysts say.

The big question is whether shipowners and energy companies will be convinced that Red Sea crossings are safe. “Vessel owners will be cautious until it is clear the situation is stabilized and risks reduced,” said Richard Bronze, head of geopolitics at Energy Aspects, a research firm.