U.S.-U.K. Lead Strikes Against Houthi in Yemen as Red Sea Transit Stalls

The U.S. lead precision airstrikes against the Iranian backed Houthi in Yemen. The U.S. had warned of consequences if the Houthi continued attacking vessels in the Red Sea. The Houthi’s 27th and most ‘complex’ attack on U.S. flagged ships appeared the linchpin. Biden ordered the U.S. conduct follow on strikes to fully destroy previous targets. Additionally strikes on Yemen have followed, although the U.S. has not taken responsibility.

The U.S. has (1) committed to fighting over an uncertain timeframe; Houthi rebels will not be easily dismantled (2) increased risks of asymmetric escalation (3) not given assurance that Red Sea transit is safe.

The U.S.’ kinetic response commits itself to an open-ended conflict with Iranian proxy fighters eager to challenge America. The group quickly vowed revenge and launched a “never to America” media campaign despite a successful U.S. operation. Iran will continue to supply Houthi fighters with weaponry, happy to degrade U.S. capabilities indirectly. The strikes in Yemen leave America committed, while the Houthi have optionality to walk away and immediately end the conflict.

U.S. intervention risks asymmetric escalation against itself, Israel, and allies. The U.S. may face additional attacks against regional bases or indirect/direct Iranian escalation (direct involvement remains unlikely). Strikes increase the threat of escalation against Israel by the Houthi and aligned militant groups. Also, concerns continue to grow surrounding Jewish and Israeli targeted terror. Mossad reported working alongside Sweeden to prevent a Hamas terror cell from attacking Israel’s embassy yesterday.

Commercial shipping has grown increasingly hesitant to transit the Red Sea in light of U.S. strikes. Many shipping operators, including segments previously less affected like bulkers and tankers, immediately announced a temporary pause on Red Sea transit. Other ships were given instructions to turn around and round Africa. Houthi attacks in the Red Sea continue. Commodity carrying ships may return more quickly; however, consumer cargo is unlikely to resume Red Sea transit without a lasting period of peace or an agreement. Container carriers are also incentivized to reduce supply via routing around Africa until annual contract negotiations conclude in May.

The current disruption is a supply chain inconvenience, but sustained Red Sea avoidance would prove a logistics nightmare. The decreased routing optionality would congest available routes. Container rates continue to climb, up 15% w/w (Drewry World Box Index). Moreover, petroleum tanker supply is expected to tighten. Continued sharp upward moves in shipping costs threaten oil/fuel prices, disruptions to the supply chain, and persistent inflation. Albeit demand shifts and increased containership supply make a return to the 2020-2022 phenomena unlikely.