War risk premiums back in oil and shipping as Houthis seize vessel in Red Sea

The seizure of a cargo ship off the coast of Yemen by the Houthis on Nov. 19 has seen the return of war premiums for oil and shipping in the region, analysts said.

The Iran-aligned Houthis announced Oct. 31 their decision to join the ongoing conflict between Israel and Hamas, a militant group based in the Gaza Strip.

The Houthis previously aimed their missiles and drones at Saudi Arabia, a country it has been at war with since 2014, leaving a trail of impact on energy infrastructure in the world's largest oil exporting country.

The Houthis' spokesman Alameed Yahya Saree issued a statement Nov. 14 announcing the group's intention "to sink" Israeli ships in the Red Sea.

On Nov. 19, the group seized a cargo ship, which they claimed to be Israeli-owned and threatened all ships affiliated with Israel in any way that they would be at risk of seizure.

Galaxy Leader, the Bahamian-flagged vessel seized in the Red Sea is chartered by Japanese company NYK Line and is part-owned by Israeli billionaire Abraham Ungar.

The seizure of the vessel will indicate to shipowners transiting the Red Sea that war risk premiums will rise, Luv Menghani, a shipbroker with Dubai BluePeak Commodities and Shipping, said.

"As a shipbroker, I'll have to do more KYC when I'm offering my client a ship to see if there is any Israeli ownership involved in this ship," he said. "Shipbrokers will have to get armed guards on board ships transiting these waterways a lot more than they used to, increasing costs."

Menghani said that the Houthis also engaged in piracy around the Gulf of Aden and the Red Sea in August and posed a continued threat to shipping in the region.

NYK Line, which chartered the vessel seized by the Houthis on Nov. 19 has placed the Red Sea on "high alert" and is considering alternative routes to the waterway, S&P Global Commodity Insights reported Nov. 20.

According to the Platts Energy Security Sentinel project, through the first half of 2023, attacks on Saudi Arabia's energy infrastructure have died down, after seven recorded incidents documented by S&P Global in the first half of 2022.

Previously, attacks by the Houthis launched from Yemen were primarily responsible for around 38% of all incidents targeting Saudi Arabian energy infrastructure.

Shipping risks

Shipping insurers are also assessing the escalation in rhetoric from the Houthis with caution, weighing potential for wider flare-up in an area that is already high risk.

The escalation in Houthi rhetoric will have a "an impact on shipping insurance" even as the conflict remains contained, Eurasia Group said in a note Nov. 15.

Nations surrounding the Red Sea such as Egypt, Jordan and Saudi Arabia will be "negatively affected" by ramped up Houthi activities as they have "all have key infrastructure including ports, energy installations, and tourism projects" in the area.

Vessels that are not Israeli-flagged or owned continue to face a "plethora of complex risks" transiting the region including insecurity within Yemen that have spilled onto waterways in the region, said Munro Anderson, head of operations at specialist war risk underwriter Vessel Protect.

"[These risks] play a significant role in the current rates for maritime insurance in this area," Anderson said.

Oil risks

Oil markets, which had shaken off the impact of the Oct. 7 attack by Hamas on Israel and subsequent escalation in conflict in the region could see the return of war risk premium.

Brent futures opened higher Nov. 20, rising 0.72% to $81.19/b at the start of trading. Platts-assessed Dated Brent has declined 12.3% since Oct. 7, with the benchmark at $80.08/b on Nov. 17.

"Crude has had almost no risk premium on account of the Israel-Hamas conflict for more than a fortnight. But this incident is likely to reinject some war premium," said Vandana Hari, founder and CEO of Singapore-based Vanda Insights.

"However, the extent and sustainability of any such premium is uncertain as the picture that has emerged so far since Oct. 7 is that despite the hot tempers, the Middle Eastern neighbors are showing restraint and pushing for a diplomatic resolution," she said.

A Houthi attack targeting Saudi Aramco's Abqaiq and Khurais oil facilities in 2019 led to oil posting its biggest increase in intraday trading, after the incident shut-in half of the country's crude supplies temporarily.

Evolving threat

Houthis should be monitored as an evolving threat in the region, particularly due to the damage they can cause to regional energy infrastructure, say analysts. While the group has focused its attention on Israel, potential impact on neighboring countries should be considered.

"The fact is, [the missiles are] passing through Saudi territory, whether maritime or land. Is that going to affect Saudi Arabia by mistake? That's also something that needs to be discussed," said Bader al-Saif, assistant professor of history at Kuwait University.

Analysts such as Ilan Zalayat, Gulf researcher at the Moshe Dayan Center at Tel Aviv University, note that Houthis have proved that they can operate as an actor outside of the Yemen war, making them even more dangerous.

American bases in the Gulf and infrastructure remain vulnerable as these groups consider the US to be arming Israel, its long-term ally, Zalayat said.

The Houthis could target American troops in the Arabian Peninsula and even perhaps in the Horn of Africa, he said. "This is all in the range of the Houthis' reach."