Why is Saudi Arabia halting oil shipments through Red Sea?

RIYADH: Saudi Arabia announced last week it was suspending oil shipments through the Red Sea's Bab-el-Mandeb strait after Yemen's Iran-aligned Houthis attacked two ships in the waterway.

To date, no other exporters have followed suit. A full blockage of the strategic waterway would virtually halt shipment to Europe and the United States of about 4.8 million barrels per day of crude oil and refined petroleum products.

The Yemen war

The threat to shipping in Bab-el-Mandeb has been building for some time, with the Houthis targeting Saudi tankers in at least two other attacks this year. It is not unusual to reevaluate security after such an incident, but Riyadh's announcement also carries a political dimension.

"Rather than allowing these hostile manoeuvres to go unnoticed in the eyes of the world, the Saudi (energy) minister has placed Iran's subversions of the whole global economy under the spotlight for everyone to see," said energy consultant Sadad al-Husseini, a former senior executive at Saudi Aramco. "The capture of the port of Hodeidah will go a long way towards putting an end to these disruptions."

Hodeidah, Yemen's main port, is the target of a coalition offensive launched on June 12 in a bid to cut off the Houthis' primary supply line. After failing to make major gains, the coalition halted operations on July 1 to give the United Nations a chance to resolve the situation, though some fighting has continued.

Raise the stakes

No party has much appetite for an all-out conflict, but the situation can easily deteriorate. Both the Saudis and the Houthis appear to want to raise the stakes - with different goals in mind.

"The Houthis are trying to provoke a situation where there's a great effort to negotiate an end to the war in Yemen," said James Dorsey, senior fellow at Singapore's S. Rajaratnam School of International Studies. The risk is that one side miscalculates, eliciting a response that is stronger than anticipated. "We're just one missile away somewhere from getting into a more direct confrontation," said Helima Croft, global head of commodity strategy at RBC Capital Markets.

Options for Saudi oil

Saudi Arabia announced it was halting oil shipments through the Red Sea "until the situation becomes clearer and maritime transition through Bab-el-Mandeb is safe".

Redirecting ships around the southern tip of Africa would cost a lot more in time and money, making it an unlikely alternative.

Instead, Saudi Arabia will probably use the Petroline, or East-West Pipeline, through which it transports crude from fields in its Eastern Province to the Red Sea port of Yanbu for export to Europe and North America.

It could also charter non-Saudi ships to carry its oil through Bab-el-Mandeb, as it does with Asian customers using different routes, industry and trading sources say.

Political solution needed

Even before last week's attack, shipping companies had taken extra precautions, including armed guards, more lookouts at sea, sailing faster and increased contact with international navies.

Experts say the United States and other partners could provide naval escorts to tankers and take more steps to reduce the Houthis' capacity to target shipping, including arms supplies and help with logistics, intelligence and targeting.

While a military approach might deal with the threat to shipping, Elizabeth Dickinson at the International Crisis Group says the only real solution is a settlement to the war in Yemen, which remains elusive.

How might Iran respond?

After withdrawing from a 2015 nuclear agreement between Iran and world powers, Washington is now pushing countries to end imports of Iranian oil from November. Tehran has warned of counter-measures and threatened to block Gulf oil exports if its own exports are halted.

Despite exchanging bellicose threats with President Donald Trump, Iranian officials consider the possibility of a military confrontation with the United States "very low".

Besides disrupting the flow of oil in the Gulf, insiders say that in a direct confrontation, Iran could target US interests from Jordan to Afghanistan, including troops in Syria and Iraq.

Tanker war unlikely

During the "tanker war" of the mid-1980s, Gulf waters were mined as Iran and Iraq attacked oil shipments. US, British and other foreign forces escorted other nations tankers - with some Kuwaiti ships reflagging with the US banner - and conducted limited strikes on Iranian maritime targets.

While the Saudis could fly different flags now to try to avoid Houthi attacks, analysts say that would undermine their efforts to project power in the region.