Saudi Arabia Adjusts Oil Export Routes Following Pipeline Disruption

Saudi Arabia, the world’s second-largest crude exporter, is adjusting its oil export strategies due to recent drone attacks that damaged the East-West pipeline, halting oil flow and removing 4-5 million barrels per day (bpd) from global supply. The Associated Press estimates that repairs may take three to five weeks, according to two regional officials. The 1,200km (746-mile) pipeline connects the kingdom’s main oil-producing fields in the east with Yanbu port on the Red Sea coast, allowing Saudi crude to bypass the Strait of Hormuz. The Strait has been largely closed since the onset of the conflict between the United States and Iran on February 28. Saudi Arabia’s oil exports have significantly decreased, with total loadings dropping from over 7.5 million bpd in January and February to about 2.3 million bpd in August and approximately 2.1 million bpd in the first half of September, representing a decline of more than 70 percent. Analysts suggest that the actual loadings may be higher, as some shuttle tankers crossing Hormuz may not be captured in vessel data due to tracking being switched off. Saudi exports typically rely on two coastal routes: the Gulf in the east, where crude moves through the Strait of Hormuz, and the Red Sea in the west, where it can travel north through the Suez Canal or south through the Bab al-Mandeb strait. Before the current crisis, most Saudi crude was exported through the Strait of Hormuz. With the western pipeline route closed and the southern route hostile, Saudi Arabia is likely to increase exports through the Gulf, despite the associated risks and costs. Rishi Rajanala, a research specialist at LSEG Data & Analytics, indicated that with the East-West pipeline offline, options are limited. Potential alternatives include shipping more crude from Gulf terminals through the Strait of Hormuz and utilizing stored crude from the west coast and Egypt’s Ain Sukhna and Sidi Kerir terminals. Richard Matthews, director at Gibson Shipbrokers, noted that transiting back through Hormuz could increase freight costs and create inefficiencies. The use of dark tankers, which switch off their AIS transponders, is one method to mitigate risks during transit. If the outage extends, stored volumes will diminish, and any crude that cannot be exported will need to be stored or left unproduced, further impacting production levels. Rahul Choudhary from Rystad Energy reported that exports through the Strait of Hormuz have increased to over two million bpd in early September, with expectations for further increases as Saudi Arabia adjusts its strategies. The East-West pipeline, built in 1981 to reduce reliance on Hormuz, has a maximum capacity of about 7 million bpd. However, the recent military actions by Iran-backed Houthi forces have complicated the situation, as they control the Bab al-Mandeb strait, blocking southern routes for tankers. Consequently, tankers must travel north through the Suez Canal or use the Sumed pipeline to reach Europe, which adds significant time and cost to shipments. Experts have noted that while oil prices have remained relatively stable due to stockpiles and strategic reserves, prolonged disruptions could lead to price increases. Currently, Brent crude is trading above $105 a barrel. Saudi Arabia’s main buyers include Asian and European refiners, with China being the largest importer. The shutdown has already affected scheduled cargoes, forcing refiners to seek alternatives from other regions. Despite higher oil prices benefiting Saudi Arabia, the inability to export at normal volumes poses risks to public finances, with forecasts indicating a potential budget deficit of 5 percent of GDP in 2026. Louis Vincent-Gave from Gavekal Research emphasized the uncertainties surrounding Saudi Arabia's oil flow and the potential need for the government to sell assets to meet financial obligations.