Iran retaliates across Gulf as Houthi blockade strips away Saudi Arabia's oil rerouting option

Diplomacy stalling as Iran war escalates? The US struck Iranian military command centers, launch sites, and air defenses yesterday, marking the 11th straight day of US strikes on Iran, US Central Command said. While Pakistan and Qatar floated a 10-day pause in the fighting to revive the interim ceasefire agreement that collapsed in early July, US President Donald Trump has downplayed the prospects for negotiation, saying Iran must “meet in a meaningful way” first, Bloomberg reports. Iran’s Foreign Minister Abbas Araghchi said Tehran won’t abandon diplomacy, but won’t be forced back to the table while under military attack.

Iran retaliated across the Gulf against US bases in Kuwait, Bahrain, and Jordan on Tuesday, reportedly including Amazon infrastructure at a Bahrain data center. A tanker in the Strait of Hormuz was hit by a projectile, forcing its crew to abandon ship. Iran’s Revolutionary Guards said two oil tankers caught fire attempting to transit the southern shipping lane.

Kuwait is Iran’s softest Gulf target: Its proximity to Iran and heavy US troop presence made it the second-most-targeted Gulf state after the UAE, with around 1.4k missile and drone attacks to date, the Financial Times reported. Iran recently hit an oil facility, two power plants, and a desalination plant, raising real concerns about water and power supply in a country almost entirely dependent on desalinated seawater.

A new front

Yemen’s Houthis declared a naval blockade on Saudi Arabia on Monday, with military spokesperson Yahya Saree framing the move as an “eye for an eye” response to what the group calls a Saudi siege on Yemen. The Houthis then sent a letter to shipowners warning against calling at Saudi ports. Unlike the 2023-2025 Red Sea campaign (which mostly hit Israel-linked vessels), this move directly targets Riyadh.

The corridor: Bab Al Mandeb carries 12% of world trade and a quarter of Suez-bound container traffic. It’s also Saudi Arabia’s escape hatch: With Hormuz effectively shut since late February, Aramco pushed its East-West pipeline to a record 7 mn bbl / d (converting parallel natural gas liquids lines to crude service) and shifted up to 5 mn bbl / d of exports through the Red Sea port of Yanbu. Loadings at Yanbu climbed to more than 4 mn bbl / d by March, compared to about 1.1 mn bbl / d in February.

The blockade is already biting: Two tankers loading Saudi crude for China and India at Yanbu made U-turns Tuesday, heading toward Suez instead of the Indian Ocean via Bab Al Mandeb. Crude shipments through Bab Al Mandeb have already dropped 36% in two weeks — weekly loadings from Saudi west coast ports fell to 6.1 mn bbl / d in the week of 13 July from a 29 June peak of 9.5 mn bbl / d, according to Kpler.

Both Saudi exits are now threatened at once: For the first time in the war, Hormuz is near-standstill and Bab Al Mandeb faces a declared blockade. A full Bab Al Mandeb closure could remove some 7% of global oil supply on top of the ~10% the war has already taken out — stripping away the redundancy that let Riyadh reroute in the first place. Kuwait, Qatar, and Iraq have no Hormuz alternative at all.

The cargo hit compounds it: A full closure would badly disrupt Red Sea freight — “severely impacting capacity available,” particularly for niche carriers still working the lane, Vespucci Maritime CEO Lars Jensen tells EnterpriseAM.

Racking up the bill

Ins. is already repricing: War-risk premiums for ships jumped to about 0.75% of vessel value from about 0.3% last Friday, Reuters reports. Mistaken-identity risk is also high for Saudi-linked ships and those calling at Red Sea ports, according to British maritime security company Ambrey, given Houthi patterns during the 2024 crisis.

Meanwhile, Defense Secretary Pete Hegseth told senators the war has cost the US USD 37.5 bn — up from USD 29 bn in late May — and requested another USD 70 bn in supplemental funds.

A rare bright spot

Israel pulled back its forces from southern Lebanon as a US-brokered truce takes effect. The truce is premised on Beirut exerting military authority over Iran-backed Hezbollah forces. This coincides with Lebanese President Joseph Aoun’s sit-down with Trump yesterday, the first meeting between the two nations' heads of state in roughly 20 years.