Yemen Counter-Offensive and Iran's Hormuz Closure Heighten Oil Market Risks

Yemen’s Saudi-backed government forces have initiated a major counter-offensive against the Houthi rebels, escalating tensions in a region critical to global oil supplies. The offensive follows weeks of territorial gains by the Iran-backed Houthi group, which has captured key areas along Yemen’s Red Sea coast. Rashad al-Alimi, head of Yemen’s Presidential Leadership Council, announced the start of military operations aimed at retaking remaining territory from the Houthis, describing them as a 'terrorist militia.' Government forces, supported by heavy Saudi air strikes, advanced along the Bab el-Mandeb Strait, seizing key positions around Dhubab and capturing an airstrip. However, the Houthis disputed these claims, calling them 'completely untrue.'

The renewed fighting poses fresh risks to oil markets already under pressure from Iran’s closure of the Strait of Hormuz. Iran has stated that Hormuz will remain closed until Washington meets seven conditions outlined in the Islamabad Memorandum of Understanding. Mohammad Baqer Qalibaf, Iran’s parliamentary speaker, emphasized that the strait would not reopen until these conditions are met, adding that the US must stop dragging out negotiations. Despite Iran’s stance, Middle Eastern crude exports have recovered significantly, reaching 18.3 million barrels per day in late September, though prices remain high due to lingering disruptions and elevated freight costs.

The conflict in Yemen and Iran’s control of Hormuz threaten two critical energy routes. Bab el-Mandeb, which connects the Red Sea to the Gulf of Aden, is vital for global energy supplies, with 8.1 million barrels of oil passing through daily. The fighting around this strait and Houthi attacks on Saudi infrastructure leave both routes vulnerable to further instability. OPEC+ has agreed to maintain current production levels, but global inventories have fallen, keeping the oil market tight. Brent crude remains above $100 a barrel, reflecting ongoing supply constraints and geopolitical risks.