Disruptions in the Strait of Hormuz have redirected more Middle East oil shipments towards the Red Sea and the Bab el-Mandeb Strait, leaving flows more exposed to regional conflict. The Houthis have said they will impose a maritime blockade on Saudi Arabia, prompting the Saudi-led military coalition in Yemen to implement operational measures to protect shipping in the Bab el-Mandeb. Via the East-West pipeline, roughly 4mn barrels per day of Saudi oil is now shipped through the Red Sea, meaning any interruption could affect Asian countries reliant on Middle East supply.
A broader disruption of the Bab el-Mandeb could push some tanker and cargo traffic onto longer routes, including through the Suez Canal and around the Cape of Good Hope, which would raise container freight rates and transport costs. Market attention is also on the durability of any such disruption, given the Houthis’ current capability constraints and the challenge of distinguishing Saudi-linked vessels. Behind-the-scenes discussions are continuing through mediators, while the US mid-terms and reported US military munitions constraints are among factors associated with expectations that oil prices may not return to earlier conflict highs.
Shifting Oil Flows and Exposure to Volatility
We see a clear shift in Middle East oil flows toward the Red Sea and the Bab el-Mandeb strait due to ongoing vulnerabilities in the Strait of Hormuz. This shift puts roughly 4 million barrels per day of Saudi crude, transported via the East-West pipeline, directly in the path of potential regional conflict. Derivative traders must prepare for sudden, short-term volatility in freight and oil prices if these vital shipping lanes face new blockades in the coming weeks.
We recommend that options traders look at short-term call options on Brent crude and global maritime freight indices to hedge against sudden shipping reroutes around the Cape of Good Hope. Historically, rerouting ships around Africa instead of using the Suez Canal adds up to 14 days to journeys and has previously driven shipping rates up by over 150 percent. This dynamic creates highly profitable windows for long volatility positions on energy and shipping derivatives.
Strategic Trading Approaches Amid Geopolitical Risk
However, we do not expect oil prices to sustain or break past previous conflict highs of over 90 dollars a barrel. Recent maritime data shows that Bab el-Mandeb transit volumes, though volatile, have stabilized as shipping companies adapt, and the attackers lack the capability to sustain a complete blockade. Behind-the-scenes diplomatic talks and global economic pressures suggest that any price spikes will be short-lived.
Therefore, we advise traders to avoid long-term bullish bets on oil futures and instead focus on range-bound strategies like iron condors or selling premium on sharp price spikes. With global oil demand growth expected to remain modest at around 1.2 million barrels per day, overestimating geopolitical risk could lead to costly losses. Taking profit quickly on geopolitical spikes will be key to navigating the energy markets over the coming weeks.
