Oil climbed more than 2 percent on Monday after a drone strike shut Saudi Arabia’s East-West pipeline and Houthi forces moved to tighten control of the Bab el-Mandeb strait, threatening both of the Arabian Peninsula’s maritime exits at once and leaving the market without a working bypass around the closed Strait of Hormuz.
The East-West pipeline, known as Petroline, was shut on Friday after a drone strike that originated in Iraq, according to reports from the region. The pipeline is the kingdom’s overland route for moving crude from its Gulf coast terminals to Red Sea export facilities, built precisely so that exports could continue if Hormuz were blocked. With the strait already restricted and Petroline now down, Saudi Arabia has lost the alternative that made the Hormuz closure survivable. Analysts estimate the closure threatens up to 4 percent of global oil supply.
The second front opened the same day. Yemen’s Iran-aligned Houthis reached Perim island on September 11 as they moved to tighten control over Bab el-Mandeb, the strait linking the Red Sea to the Gulf of Aden. The waterway has carried 4 to 5 percent of global oil supply in recent months, and Petroline was built to feed exports into it. A conflict that began with US-Israeli strikes on Iran in February now threatens both exits from the Arabian Peninsula simultaneously.
Diplomacy stalls before it starts
The diplomatic track slipped on Sunday. Omani Foreign Minister Badr Albusaidi announced on X that the meeting between Gulf countries and Iran scheduled for Monday in Oman had been postponed. The gathering was meant to address shipping through the Strait of Hormuz and would have been the first meeting between the six-member Gulf Cooperation Council’s top diplomats and a senior Iranian official since the war began. Bahrain said Saturday it would not attend until diplomatic ties with Tehran are restored, the first visible crack in the Gulf’s united front.
Iran had dangled an offer before the postponement. President Masoud Pezeshkian said the ministers would meet in Muscat to sign an agreement establishing a joint shipping route between Oman and Iran through the strait, with the arrangement to be notified to the International Maritime Organization. Foreign Minister Abbas Araghchi was set to attend, and ministry spokesman Esmail Baghaei said eight states bordering the Gulf would take part. Pezeshkian went further in remarks to Indian audiences, saying the region does not need the United States as a policeman. Whether the postponement kills the talks or merely delays them is unclear.
Market analysts read the combination as bearish for supply. Tony Sycamore, an analyst at IG, warned in a note that unless the Oman talks produced practical results or the East-West pipeline restarted quickly, the risk is that crude extends its gains toward the $119.48 high from early March.
Attacks continue on the water
Shipping incidents piled up over the weekend. The United Kingdom Maritime Trade Operations agency said it received a report Sunday that a projectile struck a vessel in the Strait of Hormuz, with details remaining limited. Iranian state media separately reported that an Iranian commercial vessel was hit near Qeshm Island, killing one person and injuring others. Houthis also attacked targets in Saudi Arabia over the weekend, adding to the pressure on the kingdom’s infrastructure and its export capacity.
Brent crude touched $108 a barrel last Thursday, its first time at that level since May, and traded above $104 through the week. On Monday Brent rose over 2 percent and held above $100, while WTI stayed near that level too. Prediction markets put the odds of crude reaching a new all-time high by September 30 at just 3.4 percent, though the December 31 market shows 13.5 percent, a sign traders see the longer horizon as more dangerous than the immediate one.
The buffers are thinning
What makes the pipeline closure matter more than a single strike is the state of the market’s spare capacity. US crude inventories in the Strategic Petroleum Reserve have fallen to around 286 million barrels, their lowest in more than four decades, after releases earlier in the war that included 172 million barrels ordered by President Trump in March. Analysts at ANZ noted that the buffers the market has relied on are becoming exhausted, with US inventories near minimum levels and China’s low import run-rate likely to be tested as seasonal demand picks up.
Oil flows through Hormuz continue at a reduced pace, with satellite tracking suggesting several million barrels a day still moving through the strait, well below the roughly 85 vessels a day that crossed before the crisis. But every additional closed route narrows the margin. Iraq has raised exports to around 2.34 million barrels per day in August from about 1.35 million in July, a workaround that depends on Iranian approvals for its tankers and could vanish with the politics.
The inflation channel is already visible. August CPI prints across major economies showed energy pushing headline inflation higher even where core prices eased, and Treasury yields sit near multi-year highs. Every dollar added to crude flows into the inflation forecasts that central banks will use this week.
What to watch this week
Three things will set the direction. First, whether the Oman talks are rescheduled and whether Iran’s joint-route proposal survives contact with the Gulf states’ objections. Second, any sign of Petroline restarting, which would restore the only overland bypass and take the sharpest edge off the supply fear. Third, whether Houthi control of Bab el-Mandeb hardens into an enforced blockade or remains a pressure tactic that fades with negotiation.
The macro calendar compounds the risk. The Federal Reserve meets September 15-16 with a rate hike all but priced in after hot CPI data, the Bank of England follows on September 17 and the Bank of Japan on September 18, with the BOJ widely expected to lift its policy rate to 1.25 percent. Central banks now face an oil shock arriving on top of already-hot inflation data, and each has to weigh fighting prices against avoiding a recession while a war constricts energy supply.
For oil traders, the question this week is not whether the geopolitical premium stays, it is how much higher it goes before any diplomatic off-ramp appears. With two chokepoints under threat and the reserve buffers drained, the market has little room left for another surprise.