Oil prices rose at the start of the week after the Saudi East-West pipeline was shut down as a precaution following an attack, temporarily reducing the market's ability to benefit from one of the most important alternative routes to the Strait of Hormuz, coinciding with the postponement of a regional meeting in Oman that was scheduled to discuss navigation arrangements through the strait.
Brent crude rose as much as 3.6% to above $108 a barrel, before paring gains and trading at $106.95 at 10:16 a.m. in Singapore, while West Texas Intermediate crude traded above $102.
Saudi Arabia announced on Friday that it had halted oil flows through the East-West pipeline as a precautionary measure after it was targeted in the Riyadh and Medina regions. Technical and emergency teams began work to verify the pipeline's safety and repair the damage. The Kingdom did not announce a date for the resumption of flows.
The pipeline has gained added importance since the disruption of shipping in the Strait of Hormuz, as it transports crude oil from eastern Saudi Arabia to the port of Yanbu on the Red Sea, providing an alternative route for oil exports that bypasses the strait. Its design capacity is approximately 7 million barrels per day.
Bloomberg quoted June Goh, senior oil market analyst at Sparta Commodities SA, as saying that it all depends on the duration. She added that if flows resume quickly, the impact should be limited, as inventories in Yanbu, the western end of the pipeline, can be drawn upon.
For his part, Sufroo Sarkar, head of energy research at DBS Bank Ltd, believes that stockpiles in Yanbu can support exports for five to seven days, adding that he is waiting for clarity on the reforms, but the near-term trajectory points to a test of the $120 per barrel level.
Iraq also moved to contain the fallout from the attack, after Saudi Arabia announced that the drones targeting the pipeline had originated from Iraqi territory. On Saturday, Prime Minister Ali al-Zubaidi ordered an investigation after it was revealed that the attacks were launched from a location in a border region with Iran.
Postponing the Salalah meeting leaves the Hormuz ambiguity unresolved.
The price surge also came after Oman announced the postponement of the Salalah meeting, which was scheduled for Monday and was to include Gulf states, Iran, and Iraq, in order to reach an agreement. The meeting was to discuss arrangements for navigation through the Strait of Hormuz, following Tehran's announcement of reaching an understanding with Muscat on a framework for establishing a designated transit route.
But Iran had made it clear that any new arrangement would not mean a full reopening of the strait, and that it would still determine which ships were allowed to pass through, leaving uncertainty about energy flows from the region.
U.S. Energy Secretary Chris Wright warned on Sunday against expecting a quick breakthrough on Hormuz, noting that markets still depend on flows of about 10 million barrels per day of crude and petroleum products through the strait, along with bypass pipelines, and estimated that total flows had returned to about two-thirds of their previous levels or slightly more.
On the other hand, the American pressure on Iran continues, as the US Central Command said that its forces forced 101 ships to change course since the resumption of the embargo on Iran.
In an indication of these pressures being reflected internally, the IRNA news agency reported that President Masoud Pezeshkian directed the rationalization of fuel consumption in the country, amid the American blockade on Iranian ports.
Bab al-Mandab adds another risk to energy flows
Traders are also monitoring developments in Yemen, amid clashes between Houthi militants and government forces near the Red Sea coast, raising concerns about shipping through the Bab al-Mandab Strait, another vital chokepoint for global energy trade.
Oil prices have jumped by about 76% since the beginning of the year as the conflict between the United States and Iran intensifies in the region, exports decline, and shipping is disrupted. The crisis has also driven up prices for natural gas and petroleum products, including gasoline and diesel, further increasing inflationary pressures on the global economy.
In the United States, data last week showed that prices accelerated in August, reinforcing bets that the Federal Reserve might raise interest rates, at a time when energy costs have become one of the most prominent economic repercussions of the ongoing war.
Brent crude closed down 2.8% on Friday at $104.61 a barrel, but still posted weekly gains of about 8.7%, as concerns about Middle East supplies persisted and risks surrounding key energy corridors escalated.
Latest price movements
Brent crude for November delivery rose 2.2% to $106.95 a barrel at 10:16 a.m. Singapore time.
The price of West Texas Intermediate crude for October delivery rose by 2.3% to $102.34 a barrel.
