Yemeni Houthis have entered the chat

Commentary summary:

• Bab el-Mandeb risk is real but Saudi has a workaround — SUMED and Cape routing add cost, not a full shutdown. The bigger fear is attacks on Saudi ports themselves.

• WTI is looking attractive everywhere but cannot supply the world.

• Ukraine is quietly dismantling Russia’s Baltic export capacity. 2 mb/d
potentially offline. This barely registers next to Hormuz, but it should.

With all usual caveats, obviously the below can age very badly within a few hours, but as I write this on Monday morning US hours Brent is north of $115 /bbl and the war has just added a new front over the weekend.

Houthis fired ballistic missiles at Israel on Saturday, their first since the conflict began, and the deputy information minister went on record saying a Bab el-Mandeb blockade is among their options. This matters, but perhaps not quite as simply as late Friday trading flat price surge initially suggests.

The reflexive take is that Houthi disruption of the Red Sea kills Saudi’s Yanbu bypass and we lose Hormuz AND the reroute simultaneously.

The reality is more layered. Saudi’s East-West pipeline is at full capacity per reports; 7 mb/d, with 5 mb/d exiting via Yanbu. If Bab el-Mandeb closes, those barrels don’t become trapped like Hormuz supply.

Laden VLCCs can’t transit Suez on draft restrictions, but the SUMED pipeline connecting Ain Sukhna to Sidi Kerir provides a workaround for Med-bound flows. Asia-bound cargoes would likely be forced around the Cape after crossing Suez, adding considerable time and cost per voyage; but the barrels still move.

The real tail risk isn’t transit disruption; it’s attacks on Saudi loading infrastructure itself. If Yanbu comes under direct Houthi fire and loadings are affected, transit flexibility matters far less. That’s the scenario where flat price has no ceiling.

We said last week our usual focus points were “nigh untradable” on relative value and that flat price felt too relaxed.

Flat price has since corrected violently, Brent up roughly $8 /bbl on the week, but relative value remains a mess, perhaps more so. DFLs are above $10 /bbl (cue the cartoonish triple take), yet light crude cracking margin composites are looking quite weak outside of WTI indexed crudes globally.

Absent any diplomatic breakthrough it does feel a bit like a tug-of-war on cracks working to overcome steep structure and freight vs. real demand destruction creeping in at these levels.

Trump seems to be continuing his usual tack of trying pushing price lower via tweet and possibly manufacture some sort of escalation off ramp but his (latest) deadline of April 6, when strikes on Iranian energy infrastructure are set to escalate, is the binary (or set for deadline extension again).

The workability of WTI is the lone bright spot in the market. TI/Brent at –$13.80 is doing such heavy lifting that Midland lands $8-16/bbl undervalued vs. a traditional trade basket into NWE and Med even with TD25 at $135/mt, roughly double its two-month average (but off the highs).

(TD25 off the highs but vessel count still extraordinarily tight)

Afra availability in the USGC is dire at 3 open vessels against a 10-ship norm, so freight is expensive and not set for any reprieve, and yet the discount is so extreme it doesn’t matter.

WTI clears into both Europe and Asia, which basically no other Brent indexed grade can say.

North Sea looks unworkable anywhere outside of its home market and WAF eastbound doesn’t offer a single positive margin for cracking refineries in June delivery. The USGC is the marginal barrel for the world right now, basis TI/Brent.

(WAF cracking margins in Asia looking unworkable)

And then there’s Russia, which risks getting completely buried in the Hormuz noise. Ukraine hit Primorsk and Ust-Luga three times in five days last week, with Zelensky claiming 60% of Ust-Luga’s capacity is degraded.

While not a new story the energy conflict is now a very real three front issue in Hormuz, Russia, and now the Red Sea it feels even at $115 Brent the asymmetric risk is still very much underpriced here.

And with the US potentially opening up yet another ground war in Asia (what is the saying about ground wars in Asia, again?) the path of conflict is skewed to escalation and duration.

I’ll be forgiven for being skeptical of the Pentagon plans calling for “weeks” for any ground operation should that materialize with ground forces now in theater. We’ve heard that before; Iraq, Afghanistan were both “weeks not months” military operations. The primer is still present for flat price to still go meaningfully higher.

But with Trump seeming looking to manufacture a political off ramp the risk is a phone call nobody expects.