The Houthi Threat To Oil Markets Is Back

The oil markets certainly remember September 14, 2019, when Yemen’s Iran-backed Houthis launched a drone attack on Aramco oil facilities in Eastern Saudi Arabia, cutting Saudi oil production in half - or taking some 5% of global supply off the market. The attack destabilized global financial markets, even if only briefly. 

Now we see the specter of a Houthi threat to Saudi oil re-emerge with the failure to renew a ceasefire in Yemen last week. The truce expired on October 2nd after having been extended twice in the past.

Already, violence has returned. Last weekend saw what has been described by Yemeni media as a “massive explosion” near a Canadian oil company’s operations in Yemen, though the cause of the explosion remains unknown, including whether the Houthis were behind it or it was the result of some other dispute. Regardless, the factions fighting in Yemen are all on edge now, waiting for the other shoe to drop. 

We also saw a Houthi drone attack on Yemen’s Al-Dhabba oil port in Hadramout last Friday, which the Saudis have described as “an escalation” of violence after the truce expired. The attack saw two drones launched at the port, timed for the entrance of an oil tanker and clearly meant as a warning.

The real question here is how much control is Iran exercising over Yemen’s Houthis, considering that Yemen has long been a proxy battleground between the Saudis and Iran. Back in 2019, there was some disagreement among Western powers as to the extent of Iran’s backing of the Houthis, with Washington squarely blaming Iran and suggesting this was an Iranian attack on Saudi Arabia, while Western European capitals suggested Iranian responsibility on a lower level - not as the orchestrators of the attack. 

While Iran may not fully control the Houthis, and not every action on the ground in Yemen is directed by Tehran, the Houthis certainly owe much of their weaponization to Iran - as well as their training. When geopolitically convenient, Iran will use the Houthis to demonstrate its ability to destabilize the Gulf, and when the Houthis suddenly step up their rhetoric beyond their “borders” the likelihood is that they are being prompted by Tehran. 

The failure to renew the truce in Yemen suggests to us that Iran wanted to have this threat at the ready at a time when it is not only fighting ongoing protests and violent unrest at home but is very concerned about shifting alliances in the region - and with the United States. 

Geopolitics, not events on the ground in Yemen, will determine whether the Houthis launch new attacks on Saudi oil installations. It would be a tricky hedge for Tehran at this moment. Saudi Arabia and Iran have been holding talks brokered by Iraq, and the outcome so far has been mixed at best. The Saudis have recently seemed to draw closer to normalizing relations with Israel, talks with Iran may scupper that development and worsen relations between Riyadh and Washington. And now we see the UAE reinstating its ambassador in Iran (as of September), and Kuwait following in its footsteps. Peace, as such, between archrivals Saudi Arabia and Iran will have much to do with any overtures to Israel. This is the biggest balancing act in the geopolitical world (outside of dealing with China). Global markets cannot deal with another attack on Saudi oil, but the path to ensuring that doesn’t happen is an uncomfortably improved relationship between Riyadh and Washington and a sidelining of normalization with Israel. And right now, protecting Saudi oil from threats is not squarely on Washington’s agenda. In fact, the head of the Senate Foreign Relations Committee is threatening to block defense cooperation with Riyadh over the OPEC+ decision to cut oil production in November.