Morningstar

Houthi Control of Critical Chokepoint Means Oil Supply Disruptions Into 2027

Keeping long-term oil price forecast, but we’re more concerned about the near-term.

Collage illustration for Energy Sector with a gas pump.

Oil Supply Update

Iran-backed Houthi rebels have taken control of the Bab al-Mandeb strait, according to several news reports. Also, last week, drone attacks damaged the critical East-West pipeline, forcing Saudi Arabia to shut it down.

Why it matters: The Bab al-Mandeb Strait is another critical Middle Eastern maritime chokepoint, aside from the Strait of Hormuz, while the East-West pipeline is a critical artery that crosses Saudi Arabia and connects it to the Red Sea. Saudi Arabia used both as a workaround to the current crisis.

  • Before the war, roughly 4%-7% of global liquids moved through Bab el-Mandeb, though EIA estimates have shown that figure rose during the second quarter. Houthi control of this strait disrupts one of the world’s major suppliers and heightens the risk of escalation.
  • While we previously flagged that recovery was quicker than expected following the now-failed earlier Memorandum of Understanding between the US and Iran, we now believe something akin to our prior bear case scenario is more likely and that the disruption of flows will persist into 2027.

The bottom line: We aren’t changing our $65 per barrel Brent midcycle oil price estimate, as stated in real terms, but we’re far more concerned about near-term supply disruptions than we were previously. While Saudi Arabia can keep loading crude, it must rely on a thin storage cushion.

  • How quickly flows normalize will depend on how fast Saudi Arabia can restore the pipeline. We’ve read that the country could partly restore the pipeline through one of its two lines, even as full repairs could take multiple weeks. But even so, Houthi control of the Red Sea will still hurt flows.
  • We continue to model oil price futures in our next two-year assumptions as we have no edge over markets here. Long-term, however, we see greater opportunity in the gas supply chain in names such as Expand, Antero, and Baker Hughes, particularly as cheap Permian supply hurts gas companies.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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