Saudi Pipeline Outage Hits an Oil Market Running Out of Buffers

Primary Journalistic Dispatch & Direct Reporting

Gone are most of the cushions the market had in the early weeks and months of the Middle East conflict.

The oversupply from early this year has disappeared as oil on water was drawn down quickly when the Strait of Hormuz was closed to tanker traffic in March.

Record stock releases led by the International Energy Agency (IEA) depleted strategic inventories in developed economies, including in the United States, where the Strategic Petroleum Reserve (SPR) now holds the lowest level of crude oil since the early 1980s.

In-Depth Developments & Factual Context

China, which strategically slashed its crude oil imports by about 4-5 million barrels per day (bpd) in May and June, has started to gradually ramp up purchases, removing a significant demand-side balancing mechanism that had prevented oil prices from spiking to record highs in the spring.

With few buffers left to absorb the six-month-long disruption of oil flows at the Strait of Hormuz, the last thing the market needed was an escalation that put a key non-Hormuz flow valve at risk.

But here we are: the vital East-West oil pipeline in Saudi Arabia, which helped the Kingdom bypass the Strait of Hormuz and export most of its crude oil from the Yanbu port on the Red Sea, is now out of service - possibly for weeks - following drone attacks at the end of last week.

Industry Impact & Strategic Analysis

Thanks to the East-West pipeline, for half a year Saudi Arabia has managed to re-route most of its crude loadings from the western ports in the Persian Gulf to the Red Sea port of Yanbu. However, the closure of the pipeline has now introduced a major risk to about 4 million barrels per day (bpd) of Saudi crude oil shipments from Yanbu.

Saudi Arabia may be able to sustain exports for days by drawing from Yanbu's stocks, but a longer disruption to the pipeline operations could jeopardize the Red Sea flows, which are already under intense scrutiny by the Iran-aligned Houthis in Yemen, who are targeting Saudi shipments and even hit some tankers in July.

While Saudi Arabia's customers in Asia are scrambling for updates , the oil market is pricing in another disruption to the Middle East's oil flows at a time when the buffers are all but gone, and the fuel markets and prices are flashing severe tightness across continents.

Forward Outlook & Market Perspective

Chevron CEO Mike Wirth said on Friday that the market buffers have now been "played out" and oil prices could rise further over the coming months.

Wirth's comments at a University of Texas at Austin energy conference came just as the U.S. average diesel price hit $6 per gallon for the first time ever, and just as Saudi Arabia's key onshore pipeline was under drone attacks.

"It's harder to envision a scenario where prices soften and quickly," Wirth said, as carried by Reuters .

"I think the risks remain to the upside over the next few months."

In the coming months, the markets will have to face the re-escalation in the Middle East with depleted buffers amid rapidly drawing inventories.

Global observed oil inventories plunged by a further 95 million barrels in August, bringing cumulative draws since February to 507 million barrels, or 2.8 million bpd on average, the IEA said last week in its monthly report for September.

Reporting synthesized and verified under Nexvoro.tech editorial guidelines. Full primary records referenced via Yahoo Finance.