When one chokepoint becomes two

Oil markets have seen geopolitical scares before. More often than not, they fade as quickly as they emerge. Traders have become conditioned to discount war headlines unless barrels actually disappear from the market.

This time may be different.

Brent crude surged to a six-week high last week, inching towards the psychologically important $100 per barrel mark as the Middle East conflict continues to widen.

The initial risk premium stemmed from uncertainty surrounding the Strait of Hormuz, through which roughly a fifth of globally traded oil passes. But markets are now confronting an altogether different possibility: a second maritime chokepoint coming under threat.

The recent oil price movements suggest it is still hostage to the next missile flying in the region and on that scale, things remain very dicey.

Yemen’s Houthi movement has declared a naval blockade targeting Saudi Arabia, threatening shipping through the Bab el-Mandeb Strait at the southern entrance to the Red Sea.

Tankers have already turned back following the warnings, while attacks on Saudi oil tankers have raised the prospect that the world’s largest oil exporter could face disruptions to one of its principal export corridors.

That changes the equation.

For months, markets viewed the Red Sea as an alternative should Hormuz become constrained. Now, the two risks are becoming intertwined. Hormuz threatens Gulf exports. Bab el-Mandeb threatens the alternative route.

The result is not merely fewer barrels reaching consumers, but a sharp increase in shipping costs, insurance premiums, transit times and, ultimately, the geopolitical risk premium embedded in crude prices.

Equally worrying is the absence of a credible off-ramp.

Diplomatic engagement appears frozen. Each military escalation has been met with another, and negotiations remain off the table. Markets are no longer asking whether tensions will ease tomorrow. They are increasingly pricing the possibility that elevated geopolitical risk becomes the new normal for weeks, if not months.

For Pakistan, the implications are straightforward. Higher crude prices threaten to inflate the import bill, complicate inflation dynamics just as price pressures had begun to stabilise, and place fresh strain on the external account.

The government’s ambitious petroleum levy target may also become harder to navigate if retail price increases become politically difficult to pass through.

To be sure, Pakistan is entering this episode from a considerably stronger macroeconomic position than during the 2022 energy shock. The current account is healthier, foreign exchange reserves are stronger, domestic demand remains subdued and the rupee is far more stable. Those buffers should cushion the initial blow.

But buffers are designed to absorb shocks, not prolonged stress.

A temporary spike towards $100 oil is manageable. A sustained period of elevated prices driven by simultaneous disruption risks at both Hormuz and Bab el-Mandeb would be a very different proposition.

The market is no longer merely paying for lost supply. It is paying for the growing possibility that two of the world’s most strategic energy corridors could remain under threat at the same time. That is a risk premium that is far harder to unwind.