Houthi forces are advancing on a second vital shipping corridor, according to CNBC reporting on Saturday, after a week in which drone attacks from Iraq forced Saudi Arabia to shut down its East-West crude oil pipeline. The development adds a second chokepoint to a war economy already running on one, and oil markets ended the week lower on the day but sharply higher on the week.
The geography is the story. The Strait of Hormuz already carries what remains of Gulf exports under US military escort, with crude flows down roughly 45 percent from pre-war levels. Bab el-Mandeb, the southern entrance to the Red Sea, is the other exit route for Middle East energy, and it has been effectively closed to most traffic since the Houthi campaign began. A Houthi ground advance toward it threatens what little normal shipping remains, including the Red Sea transit lanes that cargo lines rebuilt at enormous cost after avoiding them for two years.
The numbers behind the squeeze
The IEA’s September Oil Market Report, published this week, put hard figures on the damage. Global oil production fell 1.6 million barrels per day in August to 100.1 million, with more than 10 million barrels per day of Gulf output shut in. Total exports from Gulf countries ran near 13 million barrels per day in August, roughly half their pre-war level. Global observed inventories have drawn down 507 million barrels since the war began in late February, an average drain of 2.8 million per day, and August alone saw stocks fall by 95 million barrels.
Refined products are the sharper end of the squeeze. Diesel in the United States crossed $200 per barrel equivalent in early September, 94 percent above pre-war levels, and pump prices hit a record $6 per gallon in some markets this week. Saudi Arabia’s shutdown of the East-West pipeline, which moves crude from Abqaiq to the Red Sea, removed one of the few workarounds for getting barrels to the Red Sea side without passing Hormuz. Saudi media reported multiple drone strikes from Iraq forced the closure.
The IEA also cut its demand forecast harder than expected. World oil demand is now projected to fall 2.5 million barrels per day in 2026, 940,000 more than last month’s estimate, concentrated in middle distillates and petrochemical feedstocks in Asia. That is the recession channel of the oil shock showing up in the data before most forecasters expected it. Supply recovery is deferred to 2027, and the agency expects this year’s total supply to fall 5.7 million barrels per day to 100.7 million.
Russia is compounding the problem from the other side of the map. Ukrainian attacks have disrupted Russian refining and nearly halted its product exports, and the IEA notes that combined Gulf and Russian diesel exports in August ran 1.6 million barrels per day below February levels. Those two sources accounted for almost 45 percent of global seaborne diesel trade before the war. Refining margins in the Atlantic Basin hit record levels as a result, led by diesel cracks, which is the market’s way of paying anyone who can still produce fuel.
Market reaction
Brent crude settled at $101.21 on Wednesday, its first close above $100 since July, then eased on Friday as traders took profit on the week. The front of the curve remains in extreme backwardation, the market’s way of saying barrels available now are worth far more than barrels promised later. Goldman Sachs called $120 Brent plausible this week, and Amrita Sen of Energy Aspects described the market as at an inflection point and headed higher. Trump, for his part, told audiences oil and gas prices would not fall until right after the midterm election, a rare admission from a head of state about his own inflation problem.
The inflation transmission is already visible. August CPI came in sticky, global bond yields hit multiyear highs, and markets now price a roughly 60 percent chance the Federal Reserve hikes rates on September 16. German central bank chief Joachim Nagel said further euro area hikes hinge on energy prices, which is a polite way of saying the ECB’s next move depends on Hormuz. Stagflation fears, the combination of rising prices and slowing growth that central banks cannot fix with one tool, have moved from analyst notes into mainstream financial coverage. Treasury yields near multiyear highs have done nothing to calm a bond market that just watched a $6 billion buyback fail to stop a selloff.
What to watch
Three things decide whether this gets worse. First, whether US escorts and bypass pipelines can hold Hormuz flows at their current reduced level, which the IEA credits for narrowing the losses. Second, whether the Saudi pipeline closure is temporary repair work or the start of a pattern of attacks on internal infrastructure, which would be harder to route around. Third, whether the Houthi advance on Bab el-Mandeb stays a ground campaign or turns into renewed attacks on commercial shipping, which would reprice freight and insurance across the entire Indian Ocean basin.
The diplomatic track shows no progress. The IEA notes negotiations between Washington and Tehran remain at an impasse, and President Trump said this week he has no regrets about starting the war. Iran, for its part, has declared a restricted zone outside the Strait and vowed it is ready for a more intense conflict. With supply recovery now deferred to 2027 and demand destruction doing the balancing work, every week that passes draws down the inventory cushion that has so far absorbed the shock. The market’s Friday dip is a pause in a squeeze, not the end of one.