US and UK strikes in Yemen: implications for global energy markets

On Thursday 11 January, the United States and the United Kingdom launched military strikes against the Iran-back Houthi movement in Houthi-controlled areas of Yemen. These strikes were in retaliation against repeated attacks from the Houthis on commercial shipping in the Suez Canal, the Gulf of Suez and the Bab el-Mandeb Strait (known as the ‘Red Sea trade route’). There is now a fear that a further escalation of this conflict could lead to trade disruptions in the Red Sea, which would have implications for global energy markets.

In 2023, 12% of global seaborne-traded oil and 8% of global LNG trade passed through the Red Sea trade route. Northbound crude oil flows also increased because Europe ramped up its imports from the Middle East to replace Russian oil volumes. The Netherlands, Italy, France and Poland are the key destination markets, of this (predominantly Saudi and Iraqi) oil.

Southbound crude oil flows via the Red Sea also increased in 2023 because Russia increased its crude oil exports to India and China, along with refined oil products to Saudi Arabia and the United Arab Emirates (which is used to either generate electricity or is re-exported). The LNG that is transported through the Red Sea predominantly originates from the US, Qatar and Egypt. The destinations for this flow of LNG are European and Asian markets.

The Houthi drone and missile attacks in the Red Sea route have so far not disrupted trade. However, several oil tankers and LNG carriers are now avoiding the Red Sea route, opting instead for a longer — and more costly — voyage around Africa. 

While this longer journey is putting upwards pressure on global oil prices, it is unlikely to represent a serious energy supply shock in the immediate future. What could cause an energy supply shock is a regional escalation that directly involves Iran, which would have massive implications for global energy markets, for at least two reasons.

First, the US could again enforce its sanctions against Iran, significantly cutting its oil exports. Global oil prices would then rise substantially, pushing inflation higher and this would further complicate the efforts of central banks to bring inflation under control. 

Second, the strikes in the Red Sea route could spark instability around the Strait of Hormuz, the world’s most important energy chokepoint. Every day, a fifth of the global oil supply and a quarter of global LNG trade pass through this sea route between Oman and Iran. Should transit be disrupted in the Strait of Hormuz, even for a few days, the repercussions for global oil and gas prices would be substantial. When it comes to the risk of regional escalation, it should be noted that the repercussions of any act of sabotage against oil and gas infrastructure in the Middle East and North Africa region would be equally substantial. 

While the implications of the Red Sea situation on global energy markets remain limited for now, the risk of trade disruptions from a regional escalation must be carefully assessed and monitored by governments in Europe.