Saudi pipeline closure drives oil prices up as Hormuz tensions rise

Crude oil prices rose Monday after Saudi Arabia closed its critical pipeline that bypasses the Strait of Hormuz, a disruption that will constrain global supplies at a time when the market is already tight.

Brent futures, the international benchmark, gained 1% to close at $105.68 per barrel after nearly hitting $110 earlier in the session. U.S. crude oil advanced 1.3% to settle at $101.39 after coming close to $105. Prices gained about 9% last week as fighting escalated between the U.S. and Iran.

Drones launched from Iraq damaged the East-West pipeline on Thursday, forcing the Saudi government to close the key crude oil artery. Riyadh has not disclosed how badly the pipeline is damaged or how long it will remain shut.

"The relatively contained price reaction suggests the market still expects Saudi inventories to cushion exports in the near term, but if the disruption extends beyond the five-to-seven-day inventory cushion, that could change quickly," said Janiv Shah, an oil market analyst at Rystad Energy, in a Monday note.

A pump station appears to have taken serious damage, said Andy Lipow, president of Lipow Oil Associates. Riyadh may be able to bypass the pump and restart the pipeline with lower output, Lipow said. This is why prices have not surged even higher, he said.

"The longer the shutdown, the higher the price. Judging from the on-line pictures, it will take months to repair," Lipow said in a note Monday.

Hormuz meeting postponed

A diplomatic meeting between Iran and the Gulf Arab states to discuss the situation in Hormuz, originally scheduled to take place Monday in Oman, was abruptly postponed after the pipeline attack.

"In the interests of consensus the regional meeting set for tomorrow in Salalah has been postponed," Oman's Foreign Minister Badr Albusaidi said Sunday in a social media post. "We remain committed to fostering dialogue that supports stability and lasting cooperation in our region."

The security situation in Hormuz remains precarious with another tanker coming under attack Sunday resulting in a severe fire onboard, according to the United Kingdom Maritime Trade Operations Centre.

Pipeline's significance

The Saudi pipeline, which can carry 7 million barrels per day, has played a key role in easing the severe oil supply disruption triggered by the Iran war. It spans the kingdom from East to West, connecting its oil producing regions near the Persian Gulf to export terminals on its Red Sea coast.

The Saudis have relied on the pipeline to shift crude oil exports away from the Gulf as Iran and the U.S. battle for control over the Strait of Hormuz. The pipeline has played a more important role in stabilizing oil markets than the massive release of strategic reserves led by the United States, Saudi Aramco CEO Amin Nasser said on the company's August earnings call.

The oil market will lose 120 million barrels if the pipeline is closed for a month and storage is drawn down at the Red Sea port of Yanbu, said Matt Smith, director of commodity research at Kpler. This assumes the pipeline carries 4.5 million bpd of exports and 15 million barrels are stored at Yanbu, Smith said.

"Losing 120 million barrels in exports across the next month would be hugely supportive for prices, particularly given we are at a juncture where the global market is already starved of barrels," Smith said.

Houthis advance

Saudi Arabia has faced escalating attacks from Iran-allied militant groups in recent days. Houthi militants in Yemen struck energy facilities and other civilian assets in the kingdom early last week injuring more than 70 people, according to Saudi state media.

The Houthis have reportedly seized the strategic Perim Island in the Bab el-Mandeb Strait after taking the port city of Mokha on Yemen's Western coast. The advances would give the militants a stronger position to disrupt oil flows through the strait, which connects the southern Red Sea to global markets.

The Houthis declared a maritime embargo of Saudi Arabia in July as they seek to control tanker traffic through the Bab el-Mandeb, which has acted as a crucial alternative route to the Strait of Hormuz for Saudi crude oil exports.