From CNBC · Spencer Kimball,Lee Ying Shan · · 2m
Saudi Arabia's backup oil route just went dark
A drone strike shut the pipeline that was keeping crude flowing around the Strait of Hormuz, and Brent jumped past $106.
In brief
A drone strike shut the pipeline that was keeping crude flowing around the Strait of Hormuz, and Brent jumped past $106. The East-West pipeline was the market's release valve for the Iran war. With it down, there is no easy way around Hormuz, and every extra week of repairs prices in higher. Originally reported by…
Crude jumps on a closed pipeline
Brent traded 2.2% higher at $106.89 a barrel Monday after touching $109.80, while WTI rose 2.3% to $102.38. Prices had already gained about 9% last week.
Drones from Iraq hit it
The East-West pipeline was damaged Thursday by drones launched from Iraq, forcing Riyadh to shut it. The Saudis have not said how bad the damage is or how long it stays closed.
A five to seven day cushion
Rystad's Janiv Shah says the muted price move means traders expect Saudi inventories to cover exports short term. Past that cushion, the calm ends fast.
“if the disruption extends beyond the five-to-seven-day inventory cushion, that could change quickly”
Months, not days
Andy Lipow of Lipow Oil Associates says a pump station took serious damage. Riyadh might bypass it and restart at lower volumes, which is why prices have not spiked harder.
“The longer the shutdown, the higher the price. Judging from the on-line pictures, it will take months to repair.”
Why this line mattered
It carries up to 7 million barrels a day from Gulf oil fields to Red Sea terminals. Aramco CEO Amin Nasser said it steadied markets more than the US-led strategic reserve release did.
120 million barrels at stake
Kpler's Matt Smith estimates a month-long closure plus drawdown at Yanbu costs the market 120 million barrels, assuming 4.5 million bpd of exports and 15 million barrels in storage.
“we are at a juncture where the global market is already starved of barrels”
Talks called off
An Iran and Gulf Arab meeting on Hormuz, set for Monday in Oman, was postponed right after the pipeline attack. Another tanker was hit Sunday and caught fire.
“In the interests of consensus the regional meeting set for tomorrow in Salalah has been postponed”
The Houthis close the other door
Houthi forces reportedly seized Perim Island in the Bab el-Mandeb after taking Mokha, tightening their grip on the strait they declared an embargo over in July. That was Saudi crude's other way out.
The main idea
The East-West pipeline was the market's release valve for the Iran war. With it down, there is no easy way around Hormuz, and every extra week of repairs prices in higher.
