A Red Sea crisis deepens as the Saudi East-West pipeline is shut down and the Houthis grab effective control of the strategic Bab al-Mandeb Strait

Boats at Bab al-Mandab Strait in the Red Sea in July.

Iran and its allies have grabbed another key Middle Eastern oil chokepoint and attacked an vital Saudi pipeline, complicating workarounds that have kept some Middle East oil flowing to global markets and pushing oil prices higher.

The Houthis, an Islamist political group in Yemen that is allied with Iran, on Friday seized more territory by the Bab al-Mandeb Strait in the Red Sea, essentially controlling the strategic waterway and compounding worries about global crude supplies as the U.S. war with Iran approaches its seventh month.

That matters because Bab al-Mandeb, which is narrower than the Strait of Hormuz, is the gateway to one of the fixes that Saudi Arabia and other Middle East crude exporters cobbled together to replace Hormuz oil flows.

Saudi Arabia said Friday that it has shut down its East-West pipeline as a precaution, noting that the pipeline suffered "multiple" attacks in the Riyadh and Medina regions on Thursday morning. Analysts at data-platform company Kpler said Friday that no crude liquids from Saudi Arabia had transited Bab al-Mandeb since Sunday.

In July, the Houthi militia declared a maritime blockade in the Red Sea and attacked Saudi oil tankers in the area. The Houthis then launched fresh attacks on Saudi Arabia's oil infrastructure earlier this week, a recent offensive that fully opens a new front in the war.

The Houthis believe they have "more leverage than ever before," said Ahmed Nagi, a senior analyst for Yemen at the International Crisis Group. "They want to show the Saudis, and the wider region, that they are a powerful actor in Yemen and the Red Sea."

The Houthis control part of civil-war-ravaged Yemen and have been locked in a decades-long regional dispute with Saudi Arabia that also flared up in 2023 during the Gaza War.

The group feels that a political track with the Saudis hasn't delivered anything, and understandings reached with Riyadh were basically frozen in 2023, Nagi noted.

"The Houthis now feel they are in a much stronger position" with additional leverage, he said. "That's why we've seen the escalation gradually expand from cross-border attacks, to what they called a maritime embargo on Saudi ships, and now to ground operations against Saudi-backed government forces."

There's also a regional angle, Nagi said. The Houthis see the U.S.-Iran conflict as part of a broader confrontation with the so-called Axis of Resistance, a loosely formed Iran-led front that also includes Hamas in Gaza and Hezbollah in Lebanon.

"They have an interest in supporting Iran while, at the same time, maintaining a strong position around Bab al-Mandab, which gives them an important strategic card if the regional conflict escalates," he said.

Saudis contend with managing two chokepoints

Saudi Arabia had ramped up oil exports through its East-West pipeline and the port of Yanbu in the Red Sea. Such loadings increased early in the Iran conflict, emerging as one of the key ways that Saudi oil has kept flowing with the Strait of Hormuz waterway at a standstill

In recent weeks, following the Houthi attacks, Saudi Arabia had pivoted yet again, looking to export oil flowing through the East-West Pipeline by moving it north on the Red Sea to Egypt and the Mediterranean Sea.

Loadings at the Egyptian port of Sidi Kerir, about 20 miles west of Alexandria, picked up as Saudi Arabia raced to offer its oil to buyers mostly from Asia. That backdoor, however, is far lengthier and more expensive than the Yanbu-Red Sea route.

Another way that Middle East crude producers have sent their oil to market has been through ship-to-ship transfers around the Strait of Hormuz off the coast of Oman, which earlier this month helped stabilize crude futures prices.

Both Sidi Kerir loadings and ship-to-ship transfers likely will increase under the new Red Sea threat, particularly for Asian customers, said Dylan Mortimer, Marine Hull U.K. war leader at insurance broker Marsh.

"Saudi Arabia is effectively trying to manage two chokepoints at the mouth of both of their export systems," Mortimer said.

As the conflict intensifies, rising energy prices, most notably record retail prices for diesel, have fanned concerns about inflation. Global financial markets are also under strain from a bond selloff BX:TMUBMUSD10Y and weakness in the U.S. dollar DXY.

A key measure of inflation rose more than expected in August, putting pressure on the Federal Reserve to raise interest rates next week to curb a rising cost of living.

Energy futures settled lower on Friday on the heels of a report calling for more demand destruction on the horizon. Even so, London-traded Brent crude (BRN00), the international benchmark, remained above $100 and up 15% this week, and turned higher late Friday after the news of the Saudi pipeline shutdown.

The U.S. average diesel price hit a fresh all-time high on Friday of $6.0556, and the U.S. average retail gasoline price saw a 13-cent jump this week to $4.2950, according to AAA.

All eyes have been on diesel, however, given it's the fuel of choice for heavy-duty vehicles and machinery. Diesel touches every corner of the economy, and rising prices also reflect intensifying pressure from the Russia-Ukraine war.

"The commercial importance of diesel makes this rise particularly alarming, with more obvious potential for high diesel prices to bleed into broader inflation than for crude," analysts at Wolfe Research said in a note Friday.

-Claudia Assis