The pinch that American drivers feel at the pump shows no signs of subsiding, with renewed conflict in Yemen raising the risk premium on global oil flows that was already high due to the Iran War.
For months, oil market experts have known that stifling tanker traffic through the Strait of Hormuz could lead to serious disruptions. But as Saudi Arabia redirected crude oil flows around the Strait, the U.S. continued record-high oil production and China slashed how much oil it bought, it appeared that those adjustments could keep prices from running amok.
Now, the expectation that prices could soon stabilize is under threat from fresh strikes between the U.S. and Iran this week and new advances along the Red Sea from Houthi rebels in Yemen.
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The Houthis now control all of Yemen’s Red Sea coastline, according to Al Jazeera, and satellite imagery suggests Saudi Arabia’s east-west oil pipeline has also come under attack. That pipeline has played a key role in allowing Saudi oil to flow despite Iran’s attempts to close the Strait of Hormuz.
The price for the global oil benchmark, Brent, rose by about $7 per barrel on Thursday to close above $108. The price fell slightly Friday morning but still exceeds $104. At the same time, diesel prices set an all-time record of $6 per gallon on average across the U.S. In California, some stations are setting the sticker price for diesel at $9.99, which is as high as they can program the signs to display. While some are doing so to indicate that they were out of diesel fuel, some stations told GasBuddy that they were selling at that price.
Who are Yemen’s Houthis?
The Houthis are a Zaydi Shia movement with ties to Iran that has been fighting Yemen’s Sunni government since 2004. About 35% of Yemen’s population identify with the Zaydi denomination of Shia Islam, according to the Wilson Center.
In 2014, the group captured Yemen’s capital, Sanaa, at the start of a full-blown civil war against the Sunni leadership. Over the next two years, the Houthis consolidated control over much of the country’s north.
Saudi Arabia has sided with Yemen’s internationally recognized government and deployed its military directly against the Houthis on multiple occasions. Over the years, Houthi attacks have targeted Saudi Arabia directly, including attacks on oil tankers and oil infrastructure.
While a UN-brokered truce within Yemen took hold in 2022, the Houthis redirected actions toward the Red Sea, attacking vessels with links to Israel amid the Israel-Hamas war. The group later began attacking ships indiscriminately.
Earlier this year, Iran’s Islamic Revolutionary Guard Corps flew commanders, missiles and drone equipment to the Houthis. The airport in Sanaa was attacked by the Saudi-backed government in July when an IRGC-affiliated flight attempted to land, Reuters reported. That’s when the peace began to break down.
How are the Houthis affecting global oil flows?
After Iran began blocking traffic through the Strait of Hormuz, Saudi Arabia found a workaround by directing more of its oil production through a pipeline to export terminals on the Red Sea.
But the Red Sea has another potential chokepoint for the global energy market, similar to Hormuz, and the Houthis are taking strategic positions alongside it.
On Thursday, the Houthis seized the port city of Mokha near the mouth of the Bab al-Mandeb Strait, which connects the Red Sea with the wider Indian Ocean. The advance did not stop there, and multiple media outlets are now reporting that the Houthis control all of Yemen’s coastline along the Red Sea.
To make the outlook for crude oil worse, U.S. officials confirmed that a pumping station on Saudi Arabia’s east-west pipeline was hit with a projectile on Thursday, CNN reported. Large plumes of smoke and damage are visible on satellite images.
Saudi Arabia’s Foreign Ministry said the drone was launched from Iraq, and “resulted in injuries and some damage.”
The East-West pipeline was “suspended as a precautionary measure,” according to the Saudi Energy Ministry.
Iraqi Prime Minister Ali Falih Al-Zaidi directed an investigation into the attack on the pipeline, with “legal measures” to be taken against anyone involved, Sabah Al-Nu’man, spokesperson for the commander-in-chief of the armed forces, said in a statement.
“The Iraqi government condemns the attacks that targeted the sisterly Kingdom of Saudi Arabia, and affirms its rejection of any aggression that harms the Kingdom’s security and stability, or prejudices the longstanding fraternal relations between the two countries,” Al-Nu’man said.
Saudi Arabia’s oil production had already reached a low not seen since the 1990s.
What does it all mean for the cost of fuel?
Americans are also seeing higher prices for gasoline, diesel and fuel oil due to bottlenecks in global refining capacity. The widening conflict and impact on Saudi Arabia’s export capabilities could push oil prices even higher, and Americans will see that change reflected at the pump as well as in the price of most consumer goods that rely on trucking for logistics.
Prior to the Houthis’ advances, the Trump administration had offered a timeline on when gas prices might fall back to where they were before the war with Iran began more than six months ago.
“Right after the election, oil prices are going to be tumbling downward,” President Donald Trump told reporters on Wednesday.
This is part of a pattern identified in a JPMorgan oil market report shared on social media this week that suggests no one truly knows how long prices could remain elevated.
“The duration of the conflict,” the report states, “has extended substantially beyond what we penciled back in May, when we expected the Strait [of Hormuz] to reopen in June.”
This expectation that the conflict is about to wind down has helped tamp down oil prices. But JPMorgan analysts said, “the market has been making much the same mistake, repeatedly pushing normalization out by a few months, only to roll it forward again as time passes.”
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