Why Oil Is Surging: Hormuz, Houthis and a Supply Squeeze

WTI crude oil has surged above 9700 on MCX and 100 on NYMEX yesterday for the first time since May, while Brent crude is already trading near the 105 level. Since the beginning of this week, crude prices on MCX have risen by around 13%, marking a sharp acceleration in the ongoing rally.

This rally is being driven by a combination of escalating geopolitical tensions, a worsening shipping crisis and growing disruptions across the global refining complex. What began as a sharp repricing in the oil market is now increasingly spilling over into broader financial markets, with higher energy prices pushing bond yields and commodity prices higher while reshaping inflation expectations and the outlook for central-bank monetary policy.

Why are Crude Oil prices going up?

Bab-el-Mandeb Strait at risk?

• Global oil trade depends on two critical chokepoints: the Strait of Hormuz (linking the Persian Gulf to the Arabian Sea) and the Bab-el-Mandeb Strait (connecting the Suez Canalto the Arabian Sea). Both are currently under significant stress.

• The Strait of Hormuz has been under pressure since February 28 this year. Bab-el-Mandeb had been serving as a temporary alternative route, but recent developments involving the Houthis have put even that passage at risk.
• Houthi forces recently seized Mocha, a strategically vital port city on Yemen’s western coast, located just 70–75 km north of the Bab el-Mandeb Strait, and are now pushing to gain control of Yemen’s entire western coastline. Reuters now reports that Perim Island, which sits in the Bab el-Mandeb Strait off Yemen’s western coast, has also fallen into Houthi hands. This could give the Houthis greater strategic leverage over the Bab el-Mandeb, potentially allowing them to disrupt or hinder a significant portion of maritime traffic between Europe and Asia via the Suez Canal.
• The Houthis have also been targeting Saudi tankers and refineries, including critical facilities like the Jazan refinery, which processes 400,000 barrels per day. A further deterioration in the region could make safe passage for oil tankers significantly harder.
• According to Kpler tracking data, some tankers from Saudi Arabia are already taking a far longer route : bypassing the Bab-el-Mandeb Strait entirely, going through Suez Canal and circling the African continent to reach Asian destinations.
• This stress on the two critical chokepoints is driving up shipping and insurance costs, which in turn is raising the landed cost of crude.

Supply in shambles:

• Saudi Arabia reported via OPEC that its crude oil production hit its lowest level since 1990, with output tumbling by 1.9 million barrels a day to 6.238 million barrels a day. Houthi attacks on refineries and storage facilities in Saudi Arabia, along with increased attacks on shipping, have impacted output. This is evident in Murban commanding a large premium over Brent, while Brent itself remains well above WTI.
• Iranian oil supply has also been reduced due to war and economic sanctions imposed by the United States.
• Since the war in Iran began, several oil infrastructure facilities, including storage sites and refineries, have been targeted. Iranian oil production has yet to recover to pre-war levels. This was reflected in lower OPEC output, with production falling by 640,000 bpd in August to 19.71 mbpd.
• Russia, another major oil supplier, is under pressure as the Russia-Ukraine war enters its fifth year. Ukraine has escalated attacks on Russia's oil infrastructure — according to Bloomberg, at least 22 attacks in August alone, hitting four of Russia's 10 largest refineries.
• Russia's crude oil production shrank in August, falling further behind its OPEC+ quota amid the intensified Ukrainian attacks. The country pumped an average of 8.718 million barrels a day last month, according to OPEC's monthly report (citing secondary sources) — a drop of 160,000 barrels a day from a revised July figure, and the steepest monthly decline since Russia's output began shrinking in December.
• U.S. crude oil production is reaching record highs, with the country accounting for roughly 18% of global crude oil production. However, U.S. shale crude is predominantly lighter in grade, making it more suitable for producing lighter refined products such as gasoline. Heavier crude, which is more commonly used to produce diesel and traditionally sourced from West Asia, requires more complex refining capacity. With some of this sophisticated refining capacity currently offline, supplies of heavier refined products remain constrained. This is one of the factors contributing to the NYMEX diesel contract trading above $200 per barrel.
• India, which has emerged as one of the world's major suppliers of refined petroleum products, has also been operating its refineries at elevated utilization rates. Indian refineries have reportedly been running at 105%–108% of capacity over the past six months, highlighting strong demand for refined products and the strain on available refining capacity.

China is back in crude market:

• China stepped back from the crude oil import market after the Iran-US conflict began, drawing down its massive stockpiles (built up to roughly 1.4 billion barrels pre-war) to meet domestic demand; a move that also helped absorb pressure on the stressed international oil market.
• Evidence now suggests China is buying again. Chinese refiners have returned to the spot market, snapping up cargoes of Russian crude (both Urals and ESPO blend), Iraqi barrels, and West African grades, pushing up prices across African, Canadian, Russian, and South American markets.
• Chinese buying still isn't back at pre-war levels, though. According to Bloomberg, it's currently heading toward 10 million barrels a day, based on estimates from late last month, compared with around 12 million barrels a day before the conflict.

Declining Inventories:

• Global crude inventories are declining, as supply disruptions and strong refinery demand continue to draw down available stocks. Lower inventories are tightening the physical market and reducing the buffer against further supply disruptions.
• U.S. crude inventories have also been trending lower, particularly as refinery utilization remains elevated and exports stay strong. Falling stockpiles are providing additional support to crude prices and increasing market sensitivity to any further supply shocks.

To Conclude:

The current rally in crude oil prices is not the product of a single shock, but a convergence of multiple stress points across the global supply chain. Two of the world's most critical shipping chokepoints — the Strait of Hormuz and the Bab-el-Mandeb Strait — are simultaneously under threat, forcing tankers onto longer, costlier routes and pushing up shipping and insurance costs. At the same time, supply losses from Saudi Arabia, Iran, and Russia have compounded each other, even as US shale and Indian refiners struggle to fully offset the gap in heavier crude and refined product capacity. China's gradual return to the import market, while still below pre-war levels, is adding fresh demand pressure just as global inventories are being drawn down, eroding the buffer that has helped markets absorb shocks so far.

Taken together, these factors point to a market with very little slack left. Unless there is a meaningful de-escalation in the Middle East or a faster-than-expected supply response from non-OPEC+ producers, prices are likely to remain volatile and biased to the upside in the near term. The key variables to watch going forward are the security situation around Bab-el-Mandeb and Perim Island, the pace of Chinese buying, and how quickly Saudi and Iranian output can recover once or if hostilities ease.

Disclaimer: https://bit.ly/DIsclaimerVen