Red Sea Threat Raises Oil Shock Risk

The threat of renewed Houthi attacks on Red Sea shipping is increasing the risk of a broader oil shock, as tensions around Iran already pressure the Strait of Hormuz and parallel instability near Bab el-Mandeb could strain two critical energy corridors at the same time.

Houthis put the Red Sea back at the centre of oil risk

The Red Sea is again becoming one of the main risk points for global oil markets. Bloomberg reported that Iran-aligned Houthis could intensify pressure on shipping in the region, increasing the probability of a larger energy shock as the conflict around Iran threatens the Strait of Hormuz.

The Houthis are an armed movement from Yemen that controls large parts of the country, including the capital, Sanaa. The group receives political and military support from Iran and is widely treated as part of Tehran’s regional network of allies. Its global economic relevance is tied not only to Yemen’s conflict, but also to geography: Yemen’s coast borders the Bab el-Mandeb Strait, one of the world’s most important maritime chokepoints.

Bab el-Mandeb connects the Red Sea with the Gulf of Aden and the Indian Ocean. Ships use it to reach the Suez Canal, the shortest maritime route between Asia and Europe. If shipowners consider the route too dangerous, vessels must sail around the Cape of Good Hope in southern Africa, increasing voyage times, fuel use, insurance costs and container turnaround needs.

The risk is now about two chokepoints, not one

The central danger in the current crisis is simultaneous pressure on two energy corridors. The Strait of Hormuz links the Persian Gulf to global markets and remains critical for oil and liquefied natural gas exports. Bab el-Mandeb connects the Red Sea to the Indian Ocean and is tied to flows through the Suez Canal and regional pipeline infrastructure.

The US Energy Information Administration has said that flows through the Strait of Hormuz in 2024 and the first quarter of 2025 accounted for more than one quarter of global seaborne oil trade and about one fifth of global oil and petroleum-product consumption. That explains why any threat to shipping near Iran quickly affects prices, insurance and trader expectations.

But if risks in Hormuz are combined with instability off Yemen, the market faces more than a local disruption. Oil, refined products, container cargo and dry bulk shipments begin competing for longer routes, freight becomes more expensive, and time buffers in supply chains shrink.

The Red Sea has already shown its vulnerability

The Red Sea crisis is not a hypothetical scenario. Since late 2023, Houthi attacks on commercial vessels have forced major shipping companies to reroute and avoid the southern Red Sea. This became one of the most serious disruptions to global logistics since the pandemic.

UNCTAD, the United Nations trade and development body, said that by mid-2024, vessel tonnage crossing the Suez Canal had fallen by about 70%, while tonnage crossing the Gulf of Aden was down 76%. At the same time, arrivals at the Cape of Good Hope rose 89% as carriers shifted away from the Red Sea route.

For global trade, that meant longer routes, higher costs and greater demand for ships. In container shipping, the effect is especially painful because delays disrupt schedules, increase the need for circulating containers and create a chain reaction in ports. For oil markets, the impact is different but no less important: voyages take longer, tankers are tied up for more days, and effective vessel capacity shrinks.

Oil flows through Bab el-Mandeb have already fallen

The US Energy Information Administration reported that crude oil and refined-product flows through Bab el-Mandeb fell by more than 50% in the first eight months of 2024. That followed attacks on vessels and the rerouting of some tanker traffic to alternative routes.

The decline shows how quickly the Houthi threat can change shipowner behaviour. Even if the strait remains physically open, insurance premiums, the risk of vessel damage, crew safety concerns and possible delays can make the route economically unacceptable for some operators.

For oil markets, the key issue is not only how many barrels physically stop moving through the strait. Expectations matter. Traders price the risk in advance, insurers raise premiums and buyers search for more reliable supply. As a result, even a limited threat can have a broad price effect.

The Suez Canal is losing predictability

For decades, the Suez Canal was one of globalisation’s key advantages: it shortened the route between Asia and Europe, reduced transport costs and allowed companies to operate with leaner inventories. The International Monetary Fund has noted that about 15% of global maritime trade volume normally passes through this route.

When ships divert around Africa, logistics become slower and more expensive. Such routes often add about 10 days or more to deliveries between Asia and Europe. For low-margin goods, seasonal products, components and energy cargoes, that changes contract economics.

For Egypt, reduced Suez Canal traffic means lower foreign-currency revenue. For European importers, it means more expensive delivery from Asia. For refiners and traders, it means more complicated supply planning. For consumers, it creates the risk that transport costs gradually feed into goods and fuel prices.

An oil shock may come through insurance and freight

Oil-market attention often focuses on production and physical supply. But in the Red Sea, the shock can come through shipping costs. If tankers must sail around Africa, they spend longer on each voyage. That reduces available tanker supply and raises freight rates, the cost of hiring a vessel.

War-risk insurance also becomes an important part of the price. A vessel sailing through an area exposed to missile or drone attacks requires additional coverage. The higher the perceived attack risk, the more expensive the insurance. Those costs are then reflected in the final cost of transporting crude and refined products.

For buyers in Europe and Asia, this means oil can become more expensive even without a full supply halt. If logistics become less reliable, the market starts paying for risk, time and security. That is why the Houthi threat can amplify an oil shock even if the actual volume of lost supply remains limited.

Maritime warnings underline the continuing threat

The US Maritime Administration maintains an active advisory for vessels in the Red Sea, Bab el-Mandeb Strait, Gulf of Aden, Arabian Sea and Somali Basin. It advises operators to account for the risk of Houthi attacks on commercial vessels and to take additional security measures.

Such warnings matter for shipowners, insurers and cargo interests. They influence corporate routing decisions, insurance terms, crew requirements and contract costs. Even if some companies are willing to use the route, their banks, insurers or clients may demand a diversion.

That makes the crisis persistent. Restoring normal shipping requires more than a temporary fall in attacks. Markets need evidence of lasting security, predictable passage rules and a low risk of sudden escalation.

Houthis use asymmetric pressure

The Houthi strategy is based on asymmetric pressure. Relatively low-cost missiles, drones and boats can threaten shipping, while protecting trade routes requires expensive warships, air-defence systems, intelligence, escorts and international coordination.

This imbalance makes the threat difficult to eliminate. Even if most attacks are intercepted, the probability of a strike changes market behaviour. Shipowners do not assess only the chance of a direct hit; they also assess crew risk, reputation, insurance, delays, legal exposure and possible cargo loss.

For Iran, this dynamic creates additional leverage. Tehran does not have to close Hormuz completely if its allies can generate pressure elsewhere in the region. That raises the cost of escalation for global markets and complicates calculations for the US, Europe, Gulf states and major Asian oil importers.

Europe is exposed through Suez and fuel

For Europe, the Red Sea has a dual significance. The Suez route carries container goods from Asia as well as some energy and refined-product flows. Longer routes raise delivery costs, delay shipments and can add to inflation pressure.

European refiners and traders depend on reliable maritime logistics. If supplies from the Middle East, Asia or transshipment hubs become less predictable, demand for inventories and alternative routes increases. That raises storage, financing and insurance costs.

For consumers, the effect may not appear immediately. Freight and insurance rise first, then wholesale prices adjust, and only later does the pressure reach fuel, airfares, delivery costs and selected goods. A Red Sea oil shock may therefore be less abrupt than a direct production halt, but more prolonged and harder to track.

Asia faces supply-security risk

For Asia, the risk of a double disruption is also significant. Major oil importers including China, India, Japan and South Korea depend on supplies from the Persian Gulf. If Hormuz becomes less reliable and the Red Sea route is also strained, regional energy security weakens.

India is particularly sensitive to linked maritime risks because much of its energy import system depends on secure routes across the Indian Ocean, the Persian Gulf and adjacent chokepoints. China also treats maritime chokepoints as part of strategic energy-reserve planning.

For Asian buyers, the issue is not only the price of a barrel. They must ensure regular supply, tanker availability, insurance, currency financing and refinery continuity. The more uncertainty there is in sea corridors, the more important strategic reserves and long-term contracts become.

Oil markets are watching for a chain reaction

The oil market reacts to the Middle East not only through current supply, but through scenarios. The first scenario is limited tension, in which shipping remains risky but continues. In that case, prices carry a risk premium, while freight and insurance stay elevated.

The second scenario is a partial blockage or sharp reduction in traffic through one chokepoint. The market then faces a shortage of tankers, longer delivery times and the redistribution of flows. The third scenario is a linked disruption in Hormuz and Bab el-Mandeb. That is the most dangerous because it affects both Gulf exports and routes into Europe through the Red Sea.

Such a scenario does not necessarily mean a complete halt to trade. But even partial disruption of two corridors at once could trigger a price spike, higher volatility, rising insurance premiums and a tougher response from central banks if a fuel shock feeds into inflation.

For shipping, the risk has become long-term

Shipping companies have already adapted to the crisis, but adaptation is not normalisation. The route around Africa has become workable for many carriers, but it requires more vessels, fuel, time and capital. That reduces the efficiency of global logistics.

Container lines can partly pass costs to customers through surcharges. The tanker market responds through freight rates and risk premiums. In both cases, global trade becomes more expensive. The longer instability lasts, the more companies reassess inventories, routes, suppliers and contracts.

For Mediterranean and Middle Eastern ports, this means changing flows. For ports near the Cape of Good Hope, it means heavier traffic. For the Suez Canal, it means a loss of part of its transit role. For insurers, it means a prolonged reassessment of war risk.

A political solution remains difficult

Military deterrence cannot fully solve the Houthi problem. Attacks can be intercepted, infrastructure can be struck and vessels can be escorted, but completely removing risk from a narrow maritime area is difficult. Geography gives the Houthis an advantage: the strait is narrow, routes are predictable and commercial vessels are vulnerable.

A diplomatic solution is also complicated because the Houthis link their actions to a broader regional agenda, including the conflict around Israel, Palestine, Iran and allied groups. That turns shipping into a pressure tool that can be reactivated during another phase of escalation.

For markets, this uncertainty means a lasting risk premium. Even if oil temporarily stabilises, insurance rates, freight and logistics decisions will continue to reflect the possibility of renewed escalation.

As experts at International Investment report, the main risk now is not one loud Houthi statement, but the possibility of simultaneous pressure on the Strait of Hormuz and Bab el-Mandeb. The global market can absorb local disruptions if alternative routes and inventories remain available, but a linked crisis across two corridors changes the scale of the problem. In that scenario, oil rises not only because of fears of shortage, but because time, insurance, freight and political uncertainty become more expensive, creating the risk of a new inflation impulse for Europe and Asia.

FAQ: Houthis, the Red Sea and oil shock risk

Why do the Houthis matter for the global oil market?

The Houthis control part of Yemen near the Bab el-Mandeb Strait, a key maritime route between the Indian Ocean, the Red Sea and the Suez Canal. The threat of attacks on ships can alter tanker routes and increase the cost of transporting oil.

What is the Bab el-Mandeb Strait?

Bab el-Mandeb is a narrow sea passage between Yemen, Djibouti and Eritrea. It connects the Red Sea with the Gulf of Aden and is one of the world’s key maritime chokepoints.

How is Bab el-Mandeb different from the Strait of Hormuz?

The Strait of Hormuz links the Persian Gulf to global oil and gas markets. Bab el-Mandeb links the Red Sea to the Indian Ocean and the Suez route. Simultaneous risk in both straits is dangerous for energy and global trade.

Why do ships reroute around Africa?

Ships sail around the Cape of Good Hope when attack risk, insurance costs or client requirements make the Red Sea route too dangerous. The diversion increases delivery times, fuel use and transport costs.

Can the Houthi threat raise oil prices?

Yes. Even without a full blockade, the market prices in disruption risk, higher insurance premiums, more expensive freight and longer delivery times. This can support higher crude and refined-product prices.

Why does this matter for Europe?

Europe depends on the Suez route for trade with Asia and some energy flows. Disruption in the Red Sea raises delivery costs and can add to inflation pressure.

Which sectors are affected first?

Shipping, insurance, oil trading, refining, aviation, logistics and companies dependent on Asian supply chains are affected first. Later, the impact can feed into consumer prices.