Brent Falls as Saudi Pipeline Exports Resume
Saudi Arabia restarts the East-West pipeline and Brent drops to $106. Why the Strait of Hormuz still keeps the oil market on edge.
Key Takeaways
- Brent (November) falls from $108.77 to $106.15 after the Saudi announcement.
- Aramco is shipping again through the East-West pipeline, capacity 7 million barrels per day.
- Iran and the U.S. are not negotiating, so supply risk stays high.
The oil market turned within hours on Monday. First the standoff between Washington and Tehran pushed Brent (November) to $108.77, then news of Saudi Arabia's reopened pipeline dragged the price down to $106.15. The December contract slipped from above $101 to about $99.
Saudi Arabia switches its bypass route back on
According to Finanzmarktwelt, citing Bloomberg, Saudi Arabia is exporting crude again through the East-West pipeline to the Red Sea. Drone attacks had knocked the line out earlier in September. Aramco had recently tested it and built up pressure. The pipeline can carry up to 7 million barrels per day, roughly 2 million of which go to refineries on the west coast, with the rest available for export.
Full capacity is expected to take about six weeks, according to the Bloomberg source. Still, the news is a signal for buyers in Europe. Some customers were told that no barrels would be allocated to them next month under term contracts. The pipeline at least partly eases that shortage.
Hormuz remains the bottleneck
The relief has limits. The war with Iran is entering its seventh month, and the Strait of Hormuz is far from open. Saudi Arabia lifted its exports through that route to more than 5 million barrels per day in September, a high since the war began. Many tankers sail with their transponders switched off, some under U.S. Navy escort. Commodities analyst Javier Blas puts crude exports from the six Gulf states at almost 80 percent of pre-war levels.
At the same time, Yemen's Houthis are stepping up attacks on energy infrastructure in southwestern Saudi Arabia, including Yanbu, the pipeline's terminus. Riyadh has issued several air-raid warnings. A new hit on the line or on tankers in the Gulf would quickly cut supply to the world market again.
Diplomacy offers no tailwind
Monday morning, politics was still pushing the price higher. Since Wednesday, Brent (November) has climbed from $98 to above $107 after hopes for talks on the sidelines of the UN General Assembly faded. President Donald Trump said he rejected Iran's latest proposal. Foreign Minister Abbas Araghchi, in turn, sees no reason to return to diplomacy. The Wall Street Journal also reports that Trump expects to resume air strikes only after the U.S. midterm elections in November.
What it means for investors
The gap of about $7 between the November and December contracts shows how nervous the market is about near-term delivery. As long as Hormuz and the Red Sea remain vulnerable, oil carries a large risk premium. News like the Saudi report can push it down briefly, but it does not make a trend. Gold and silver feel the effect too, since rising oil prices keep yields high and weigh on precious metals.