Middle East Oil Flows Recover Amid Costly Shuttle Operations and Houthi Conflict

Middle East crude oil shipments have rebounded significantly despite the ongoing war with Iran, now in its eighth month. The recovery is driven by shuttle operations, a costly workaround to evade attacks by Iran's Islamic Revolutionary Guard Corps. Saudi Arabia, the world's largest crude exporter, has also partially restarted its East-West pipeline, which was damaged in a drone strike attributed to pro-Iran militias in Iraq. Additionally, Saudi and Yemeni government forces have launched a major campaign to retake the Red Sea area, including the strategic Bab el-Mandeb strait, from pro-Iran Houthi rebels.

The shuttle operations, though effective, come with high costs, particularly in insurance. Even if crude shipments return to prewar levels, oil prices are unlikely to follow suit. Iran continues to disrupt the Strait of Hormuz, while the Houthis, who control about 30% of Yemen's territory and 70% of its population, pose a significant challenge. The U.S. has refrained from direct military intervention, instead providing intelligence and logistical support to the Yemeni government forces.

Despite recent gains, the likelihood of fully subduing the Houthis remains low. The Trump administration has postponed its response to the Iran war until after the November midterm elections, suggesting that oil prices will stay elevated at least through the end of the year. The conflict has already resulted in over 800 deaths and 150,000 displaced people in Yemen alone, according to the World Health Organization and the World Food Programme.

Crude flows through the Strait of Hormuz have recovered to 77% of prewar levels, thanks to shuttle operations. Middle East countries exported an average of 16.32 million barrels a day in September, the highest monthly figure since March. However, these operations are absorbing enormous costs, raising questions about the sustainability of the current setup.