Houthi control of the Red Sea sends oil prices soaring; U.S. Treasury yields hit highest since financial crisis
On Sept. 15 local time, Brent crude futures for November delivery settled 2.90% higher at $108.75 a barrel on the ICE Futures exchange in London. On the New York Mercantile Exchange, West Texas Intermediate futures for October delivery closed 4.38% higher at $105.83 a barrel. Both Brent and WTI marked their highest levels since May 19. The surge in oil prices dragged down all three major New York indexes, with the Dow Jones Industrial Average falling 0.63%, the S&P 500 losing 0.45% and the Nasdaq Composite dropping 0.78%.
Rising oil prices also pushed U.S. Treasury yields higher again on the day the Federal Reserve's Federal Open Market Committee began its regular meeting. The 10-year Treasury yield climbed as high as 5.041%, the highest since July 2007, at the onset of the global financial crisis. The 10-year yield also closed at 5.006%, topping the 5% threshold for the first time in three years since October 2023. The two-year yield, sensitive to monetary policy, and the 30-year yield, a benchmark for mortgage rates, jumped to 4.676% and 5.368%, respectively. The 30-year yield rose as high as 5.401% intraday, its highest since June 2007. According to CME FedWatch, the federal funds futures market priced in a 94.5% probability that the Fed would raise its benchmark rate by 25 basis points at this FOMC meeting.
The recent rise in oil prices stems from the Houthis' seizure of the Bab el-Mandeb Strait area at the mouth of the Red Sea. On July 20, the Houthis blamed Saudi Arabia for the bombing of the airport in Yemen's capital, Sanaa, declared an end to a four-year truce and launched a large-scale offensive. Saudi Arabia struck back while backing Yemeni government forces, but the Houthis' momentum proved stronger. On Sept. 10, the Houthis captured Mocha, a key port on the Red Sea coast, and on Sept. 11 they seized Perim Island (Mayyun), a strategic point within the Bab el-Mandeb Strait. Perim Island sits in the middle of the strait, splitting the shipping channel — a position of strategic importance. The Houthis also captured the strait's last two islands, Greater Hanish and Lesser Hanish, and Yemeni government forces withdrew from Perim Island on Sept. 10.
According to the U.S. Energy Information Administration, oil flows through the Bab el-Mandeb Strait averaged 9.3 million barrels a day in 2023, or about 12% of the global total. Saudi Arabia had relied on the Red Sea route through the strait after the Iran war closed the Strait of Hormuz. According to the International Energy Agency, Saudi crude supply averaged 6 million barrels a day in August, down 2.3 million barrels from July and the lowest level in more than 30 years. Brent and WTI also climbed back above $100 a barrel only after news of the Houthi takeover of the Red Sea emerged.
Reuters reported that the Houthis received direct command from Iran's Islamic Revolutionary Guard Corps as they advanced on Mocha on Sept. 10. Iran calls the Houthis, part of the so-called "axis of resistance," an "allied force" while denying they are a "proxy."
Saudi Arabia's East-West pipeline halts amid 'worst security crisis'; first alert sounded even in holy city of Mecca
Clashes between Saudi Arabia and the Houthis date back to 2014. After the Shiite Houthis seized the capital, Sanaa, and ousted the pro-Saudi Sunni government, then-President Abd Rabbu Mansour Hadi fled to Saudi Arabia. To prevent a hostile force from taking root directly on its southern border, Saudi Arabia formed an Arab coalition in 2015 and intervened in earnest in Yemen. On the surface it looked like a Yemeni civil war, but in reality it was largely a proxy conflict between Saudi Arabia, the leader of the Sunni world, and Iran, the patron of Shiites. Sunnis make up 85% to 90% of Muslims worldwide, but more than 90% of Iranians are Shiite.
The Houthis are now a quasi-state force that effectively controls about 30% of Yemen's territory and more than 70% of its population. The group began in 1992 as a religious and cultural movement organized by young Shiites who faced discrimination under the dictatorship of former President Ali Abdullah Saleh in Sunni-majority Yemen. It evolved into an anti-American, anti-Israel armed movement after the U.S. invasion of Iraq in 2003. Since founder Hussein Badreddin al-Houthi, a cleric, was killed by Yemeni forces in 2004, his younger brother Abdul Malik al-Houthi has led the organization.
Saudi Arabia, which lost its Red Sea passage rights to the Houthis, saw its "East-West pipeline" — used as an alternative route — come under attack on Sept. 10. The pipeline, at Al-Mesaba southeast of Medina, is a 1,201-kilometer overland route crossing the Arabian Peninsula to the Red Sea port of Yanbu. It has effectively served as Saudi Arabia's "lifeline" since the war broke out on Feb. 28 this year. The pipeline can carry about 7 million barrels of crude a day, or 4% to 5% of global oil supply. Crude can be exported to Europe via Egypt's Sumed pipeline and the Suez Canal, or shipped to Asia through the Bab el-Mandeb Strait and the Indian Ocean. Iraq's prime minister's office said the drone that struck the pipeline was confirmed to have launched from Iraqi territory and announced the dismissal of one military commander.
Operations on the East-West pipeline were halted immediately. The Saudi government notified some European customers of cancellations of crude cargo deliveries scheduled for late this month. WTI's 4.38% gain on Sept. 15 outpaced Brent's 2.90% rise because U.S. crude has emerged as an alternative for European refiners. The Associated Press reported that the pipeline is expected to remain shut for three to five weeks.
On Sept. 12, the Houthis attacked a military base in southern Saudi Arabia with dozens of drones and missiles. On Sept. 15, Saudi Arabia briefly issued alerts warning of possible attacks in Mecca, Islam's holiest city, as well as Jeddah and Taif. It was the first time an attack warning had sounded in Mecca since the Middle East war began. Saudi Arabia's defense agreements with Pakistan and Turkey contain no clause for automatic military intervention in a crisis, unlike NATO's. The U.N.'s International Organization for Migration said in a statement the same day that more than 70,000 people had been displaced in Yemen this month alone.
The Houthis' military pressure has also jeopardized Crown Prince Mohammed bin Salman Al Saud's dream of turning Saudi Arabia into a "global business hub." Convinced the country would collapse if the oil industry declined, the crown prince unveiled "Vision 2030" in 2016 and poured enormous funds and effort over a decade into restructuring the economy around advanced industry, finance and tourism. The Neom City project, a plan to build a futuristic new city, is Vision 2030's flagship venture.
Stretched Trump rebuffs urgent request from bin Salman; brakes effectively gone amid inflation, tightening fears
The Houthis' military campaign also derailed plans by the six Gulf Cooperation Council states to negotiate directly with Iran over passage through the Strait of Hormuz. Foreign ministers from the six GCC members — Saudi Arabia, the United Arab Emirates, Qatar, Bahrain, Kuwait and Oman — and Iran had been set to meet on Sept. 14 in the southern Omani city of Salalah for the first time since the war began. According to Reuters, only 14 cargo vessels passed through the Strait of Hormuz over the two days of last weekend.
The situation reversed as the Houthis took control of the entrance to the Red Sea and Saudi Arabia, a core GCC member, was cornered. Omani Foreign Minister Badr al-Busaidi wrote on X, formerly Twitter, on Sept. 13 that "the regional meeting that was to be held in Salalah has been postponed." Immediately afterward, on Sept. 14, multiple explosions of unknown origin were heard in Iran's southern Sirik region. On Sept. 13, an Iranian merchant vessel was struck near Qeshm Island in the Strait of Hormuz.
With the worst security and economic crisis bearing down, the crown prince has stepped up his activity. U.S. online outlet Axios reported that bin Salman called Trump twice on Sept. 10 to request airstrikes on the Houthis but was rebuffed. With Washington already struggling in the Strait of Hormuz, the U.S. lacks the military and economic capacity to support Saudi Arabia. There is also a calculation to avoid provoking voters unhappy about rising oil prices and intervention in a third country ahead of the Nov. 3 midterm elections.
On Sept. 15, bin Salman flew to Egypt to meet President Abdel Fattah el-Sisi. The two agreed to work together to ensure safe navigation in the Bab el-Mandeb Strait and the Red Sea.
Trump is no less pressed by the rise in oil prices. To make matters worse, on Sept. 15 members of Libya's Petroleum Facilities Guard, which protects installations belonging to the state-run National Oil Corp., shut valves on a crude loading pipeline linking Hamada and Zawiya. The cause was an internal dispute unrelated to the Iran war, but it added fuel to the fire in oil markets. The PFG is reportedly demanding that it be transferred from the defense ministry to the NOC. The NOC said it could declare "force majeure" if the valve remains closed or if another field shutdown occurs. A force majeure declaration is a notice to a counterparty that shields a party from legal liability when it cannot fulfill contractual obligations because of war, natural disaster or similar events.
In a Sept. 11 speech at the Pentagon near Washington marking the 25th anniversary of the 9/11 attacks, Trump said it was "a moment of enormous, terrible evil, and we will never forget," calling it "the reason we fight today." He added that he "salutes the troops dedicated to preventing Iran, the world's largest state sponsor of terrorism, from ever obtaining nuclear weapons." The remarks appeared to justify the Iran war by invoking the 9/11 attacks, which were led by Islamic fundamentalists.
On Sept. 12, meeting reporters in Dublin, Trump was asked when the war with Iran would end and replied, "It will probably be right after the midterm elections, and when that happens oil prices will plunge." On Sept. 14, he wrote on his social media platform Truth Social, "When this hoax of a war is all over, the countries of the world that gave us no help whatsoever will have to pay reparations." As the election nears, he is shortening the war's timeline without basis and shifting blame for its prolongation onto allies.
As the Middle East situation deteriorates, inflationary pressure is set to build for some time, raising the likelihood that central banks worldwide will accelerate monetary tightening. Goldman Sachs said in a report that Brent could top $120 a barrel if average Gulf oil output remains 4 million barrels a day below prewar levels.
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