Saudi Arabia is redirecting its crude oil exports through the Strait of Hormuz after the temporary shutdown of the East-West pipeline, which typically transports oil to the Red Sea coast. Saudi Aramco has reportedly sold about 20 million barrels of crude to various Asian refiners, including Chinese state-owned and independent processors, and other East Asian importers. These sales are for pickup this month and next from just outside Hormuz, utilizing a ship-to-ship transfer model where crude loads at Ras Tanura, crosses the strait, and is then transferred to long-haul tankers near Fujairah and Sohar.
This move signifies Saudi Arabia's decision to accept increased exposure to the Strait of Hormuz rather than leaving crude barrels stranded due to the pipeline outage. The East-West pipeline, which had been carrying around 4 million barrels per day, was disabled by a drone attack on September 10, leaving the kingdom with limited export options. While some Asian and European buyers have experienced delays in lifting crude from Yanbu, Saudi Arabia is actively testing and scaling up this outside-Hormuz transfer system, which it has been piloting since the summer.
The shift is critical as the alternative Red Sea export route from Yanbu has seen a significant decline in activity for Asian buyers. Chinese refiners, for example, have not loaded Saudi crude from Yanbu or Sidi Kerir since August, indicating a preference for the eastern terminals and the outside-Hormuz transfer system despite the inherent risks. Inventories at Yanbu have dropped by over 7 million barrels in the past two months to approximately 9 million barrels, highlighting the urgent need for alternative export channels. Analysts like Jamie Ingram note that the constraint has moved from production capacity to the ability to transport oil to market. If Hormuz sales cannot bridge the gap, Saudi Arabia could be forced to cut output by another 2-2.5 million barrels per day, according to Khatinoglu.
Despite the recent increase in Asian crude oil imports from the Middle East to 12.56 million barrels per day in September, up from 11.66 million barrels per day in August, these levels are still about 3.53 million barrels per day below pre-conflict averages. This suggests that while there has been a recovery, the overall situation remains challenging. The recent pipeline shutdown is expected to impact October imports, though a recovery is anticipated in November if the pipeline is repaired. Brent crude was trading around $99 a barrel, while some analysts project prices could climb significantly higher if disruptions persist, with Barclays analyst Amarpreet Singh suggesting a potential 50% increase if current conditions continue.
Saudi Arabia possesses substantial oil-revenue reserves and sovereign funds, estimated at around $3 trillion, which could provide a buffer against reduced budget revenues. While some discretionary spending has already been curtailed, Riyadh has shown a willingness to manage budget deficits to support its economic diversification goals. A prolonged export squeeze would likely lead to increased borrowing and cuts to lower-priority spending before impacting core diversification initiatives.
