Tanker Freight Rates Face Sharp Upside Risk as Security Threats Escalate in the Red Sea and the Gulf

Source: Freight Waves / Euronav

Although the Houthi movement has stated that the Bab el-Mandeb Strait remains open to most commercial vessels - except those scheduled to call at Saudi Arabian ports - many tanker owners are continuing to exercise caution, carefully evaluating the risks before sending vessels through the region.

Saudi Arabia’s Crude Export Diversification Strategy Faces New Challenges

In recent months, Saudi Arabia has increasingly relied on the East-West Pipeline to transport crude oil to the Red Sea port of Yanbu, reducing its dependence on the Strait of Hormuz.

According to industry reports, crude volumes transported via the pipeline have increased more than fourfold compared with the same period in 2025, exceeding 4 million barrels per day during June and early July.

Data from New York-based shipbroker Poten & Partners shows that, before the latest escalation in the Red Sea, approximately 2.5 million barrels of crude oil per day transited the Bab el-Mandeb Strait. Most exports loaded at Yanbu were destined for major Asian markets, including China, India, Japan, and South Korea.

However, the security situation in the region has deteriorated rapidly.

On July 22, the Saudi-flagged product tanker Encelia was attacked in the Red Sea just two days after departing Yanbu, resulting in a major onboard fire.

Over the weekend, the Houthi movement also claimed responsibility for missile and drone attacks targeting Saudi Aramco facilities in Jizan and Yanbu.

Although Saudi Aramco has not commented publicly, videos circulating on social media appeared to show large plumes of smoke rising from the vicinity of the Jizan refinery. Meanwhile, in Yanbu, two ballistic missiles targeting oil facilities were reportedly intercepted by U.S.-made Patriot air defense systems currently operated by the Greek military in Saudi Arabia.

Market Searches for Alternative Transportation Solutions

According to Poten & Partners, the operational situation in the Bab el-Mandeb Strait remains uncertain.

The firm noted that at least two Chinese-controlled Very Large Crude Carriers (VLCCs) carrying Saudi crude oil have successfully transited the strait without incident.

Nevertheless, shipowners and charterers are actively evaluating alternative routing options to mitigate operational risks.

Poten said market intelligence indicates that several Asian charterers are seeking crude cargoes loading from Sidi Kerir, Egypt's Mediterranean export terminal.

Because fully laden VLCCs cannot transit the Suez Canal, shipowners are considering two primary alternatives.

The first option involves using the approximately 320-kilometer SUMED Pipeline, which connects Ain Sokhna on the Red Sea to Sidi Kerir on the Mediterranean coast. Under this arrangement, VLCCs would partially discharge cargo at Ain Sokhna, transit the Suez Canal in a lighter condition, and then reload the transferred crude at Sidi Kerir.

The second option is to deploy Suezmax tankers instead of VLCCs. However, for long-haul voyages to Asia, VLCCs continue to offer substantial economies of scale, making them the more cost-efficient choice.

Tanker Freight Rates Under Growing Upward Pressure

Poten estimates that transporting crude oil from Yanbu to South Korea via the Mediterranean route would increase voyage duration from approximately 24 days to as much as 54 days.

While this routing remains commercially feasible, it would significantly increase the cost of delivering Saudi crude to Asian markets.

Assessing the broader impact on the tanker market, Poten commented: "Saudi crude will tilt towards Europe, Atlantic barrels will move east, Suezmax demand will rise, and the effective supply of tanker capacity will contract sharply."

According to Poten, longer voyage distances will substantially increase tonne-mile demand, providing strong upward support for tanker freight rates.

"The unusual geography of moving Yanbu crude to Asia without using the Bab el-Mandab means that even a modest diversion can generate an outsized increase in tonne-miles, boosting tanker rates."

Despite mounting concerns over shipping disruptions, global oil prices moved in the opposite direction.

On July 27, crude prices fell by around 4% after the United States announced a temporary suspension of military strikes against Iran.

According to Oilprice, Brent crude declined 3.83% to USD 93.07 per barrel, while West Texas Intermediate (WTI) fell 4.27% to USD 85.50 per barrel.

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Source: Phaata.com (According to Seatrade Maritime)

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