03 October 2024 Kpler
Issues in the Red Sea will persist for months or years to come as Iran looks to pressure Israel via its proxies.
Over the past 11 months, it would be hard to deny that tensions in the Middle East have not accelerated to a fever pitch. Following the Hamas terrorist attack on October 7, 2023, the region has descended into a chaotic state.
Of course, the war in Gaza is the focal point, but growing conflict on Israel’s northern border with Hezbollah, and Houthi attacks on vessels transiting the Bab-El-Mandeb Strait have also been flashpoints of rising discord, and outright hostility. In this month’s Commodity Geopolitics update, we focus on the latter of these issues, examining the evolution of commodity flows through the Red Sea.
However, before diving into physical flows and pricing data, this report will begin with a quick update on the geopolitical situation in the Middle East with a particular focus on how things might evolve in the Red Sea. Our core thesis is that while neither Iran nor Israel want a full-scale war, Iran will likely encourage its proxies to adopt a long-term strategy of military engagement.
This idea is encapsulated in Iran’s response to Israel’s killing of Hamas leader Ismail Haniyeh on July 31, who was located in Tehran. The move was not only highly provocative in itself but took place on sovereign Iranian territory. Nonetheless, despite expectations that Iran would escalate with a retaliatory strike, it’s been more than five weeks and yet no retaliation has taken place.
Source: Kpler
Beginning in November 2023, the Houthi’s, a somewhat loosely linked Iranian proxy group located in Yemen, began to target commercial vessels passing through the Bab-El-Mandeb Strait, a key waterway linking the Indian Ocean to the Red Sea, Suez Canal, and Mediterranean. These attacks, as we will cover later in this report, caused a sharp decline in transits from both East-to-West and West-to-East, with vessels either preferencing the route around the Cape of Good Hope or foregoing the journey altogether.
It is our view, that similar to Hamas and Hezbollah, the Houthis will continue to target vessels that attempt to transit the Bab-El-Mandeb Strait well into the foreseeable future. While the Houthi threat does not represent a direct engagement against Israel, Red Sea attacks send a clear message of alignment with Iran’s proxies in the Levant. Even if Houthi attacks slow or stop for periods of time, the likelihood of a return to normal is unlikely given wary insurers, and increasingly ingrained trade flows, which can often become difficult to redirect once established.
There is also the issue of affiliation. Unlike Hezbollah, the linkages between Iran and the Houthi’s are weaker. This is evidenced by Houthi attacks on Russian- and Chinese-origin vessels. At some point in the future, it could be difficult for Iran to convince the Houthi’s to stop their engagements in the Red Sea. No matter what, we believe that it could take many months or even years before trade flows through the Red Sea are back to norms seen before the war in Gaza began.
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