Saudi Oil Reroutes Hit Capacity and Security Limits
- Saudi Arabia is increasingly running out of alternative export routes as Houthi attacks threaten the Red Sea and drone strikes near Egypt raise risks along its remaining corridor via the Suez Canal and SUMED pipeline.
- Limited capacity through the SUMED pipeline and Suez Canal means Saudi crude exports could decline further unless Red Sea shipping becomes safer or the Houthi blockade is lifted.
- While higher oil prices have boosted Saudi revenues, the Kingdom's growing reliance on constrained and vulnerable export routes underscores the geopolitical risks facing global oil markets.
When Iran shut down the Strait of Hormuz, Saudi Arabia quickly redirected its oil flows to the Red Sea. Now, that route has become dangerous because of the Houthi blockade, so Saudi is rerouting to Egypt—and two LNG tankers in the Egyptian port of Damietta just got struck by drones. OPEC’s number-one is running out of options to reroute its oil exports.
In early March, after Iran effectively paralyzed vessel traffic via the world’s biggest oil chokepoint, every Gulf state that could redirect export flows did so. In the case of Saudi Arabia, it shifted its onshore Arab Light volumes from the Persian Gulf in the east onto the 7 million barrels per day Petroline to the port of Yanbu on its western shores. This quickly pushed Yanbu’s oil exports to about 2.47 million bpd, a massive 330% surge compared with pre-war levels, according to Windward data.
By April, Saudi Arabia was shipping over 4 million barrels daily from Yanbu, demonstrating the benefits of alternative routes for oil and oil products. Later, however, Saudi oil flows from the southern Red Sea port declined. By June, Yanbu loadings had fallen to around 2.39 million barrels daily, down by 41% from the March peak and a 66% slump from the total Saudi export level from January of about 7.96 million barrels daily across both Gulf and Red Sea terminals, Wood Mackenzie said earlier this month. Related: Finland's Sand Battery Cuts Emissions 70% Without a Single Rare Earth
The decline, on the one hand, may have been the result of the temporary Hormuz traffic resumption in late June, after Iran and the United States managed to agree a ceasefire deal. But then that deal fell through, missile strikes resumed, and Hormuz shut down again. According to the latest data from Windward, a total of five tankers went into the strait on July 29 and three exited the chokepoint. This is a fraction of pre-war traffic levels.
Meanwhile, the maritime intelligence firm also reported crude loadings in progress at Yanbu—in dark mode. There were 12 vessels at the port, including oil tankers and cargo carriers, and there were separately two “active ship-to-ship transfer pairs”. From Yanbu, Saudi vessels now sail north instead of South to avoid the Houthi blockade, which the Yemeni group declared on Saudi vessels last week.
This leaves Saudi Arabia with one maritime route out of the Middle East: the Suez Canal and the SUMED pipeline to Egypt’s Mediterranean coast. The SUMED pipeline has a capacity of 2.5 million barrels daily, which suggests it would be physically impossible for Saudi Arabia to shift all of its oil flows previously handled by the East-West pipeline and Yanbu to that conduit. Yet it could, reportedly, reroute half of them to SUMED, according to Windward.
The firm reported earlier this week that it had tracked at least three Saudi very large crude carriers moving crude oil from Yanbu to the Egyptian port of Ain Sukhna, where it would be fed into SUMED. Windward noted the tankers were sailing in dark mode until they approached Suez. There are also tankers loading Saudi crude from the other end of the SUMED pipeline, the Mediterranean port of Sidi Kerir, from where the vessels carry the oil to Asian buyers.
Theoretically, Saudi Arabia can keep sending oil north via Suez. Practically, it would be hard for the country to do that at a scale comparable to previous oil export routes, Kpler pointed out in a recent note that looked into the options on the table for Aramco. The analytics firm noted the fact that SUMED only has a capacity of 2.5 million barrels daily and, perhaps more importantly, other countries have reserved some of that capacity earlier. The Suez Canal can also only handle about 1 million barrels daily but not more. All this suggests Saudi oil flows would shrink in the coming weeks unless the Yemeni Houthis lift their blockade, which appears unlikely at this point.
With lower Saudi volumes going out, other producers would need to step up—if they can. In a rare bit of positive news from the Middle East, traffic via the Strait of Hormuz appears to be picking up, albeit moderately. ING analysts reported the development, saying that tanker crossings were still “in single digits” but higher than earlier. The report noted U.S. Energy Secretary Chris Wright as saying that some 13 million barrels daily was coming out of the Persian Gulf. This is 65% of pre-war levels, according to ING.
Meanwhile, Saudi Arabia is reaping the benefits of higher prices. The country’s budget deficit has slimmed down considerably as Brent crude has gained 47% since the start of the year. Oil production is down—by as much as 25% over the second quarter of the year—and that has affected the Saudi economy in terms of growth. Oil revenues, however, were up by 28% from the first quarter of the year. Not all is bleak for Saudi Arabia, then. However, geographical vulnerabilities would be difficult to overcome.
By Irina Slav for Oilprice.com
