Saudi Arabia Cuts Oil Shipments to Europe After Pipeline Attack

Saudi Arabia has cut oil shipments to Europe after drone attacks damaged its key East-West export pipeline, sending physical crude prices sharply higher and forcing top buyers to scramble for alternative barrels.

What happened

Saudi Arabia has cut oil shipments to Europe after drone attacks damaged its key export pipeline to the Red Sea, prompting top customers such as Poland to rush to seek alternatives as cargo prices topped $120 a barrel.

The attacks, which Saudi Arabia has blamed on Iraqi militia, forced the kingdom on Friday to shut its East-West desert oil pipeline, which has spared it from the worst of the impact of the closure of the Strait of Hormuz over the last six months.

Trading and shipping sources said Saudi Arabia had informed European customers that some September-loading crude cargoes will be cancelled.

How big is the disruption

Saudi oil buyers and traders estimated that a prolonged shutdown could put at risk around 4 million barrels a day, or about 4% of global oil supply. They estimated that oil stored at the Red Sea port of Yanbu could keep exports going for five to seven days.

The roughly 1,200km pipeline carries oil from eastern Saudi Arabia to Yanbu on the west coast. It allows exports to leave through the Red Sea without tankers passing through the Strait of Hormuz.

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Price reaction

The supply disruption supported oil prices, with Brent oil futures trading near $108 a barrel and cargo prices in Europe's physical market even higher, with key benchmark dated Brent at around $122 per barrel.

Saudi Arabia loaded 22 million barrels of oil across 12 vessels at Ras Tanura/Juaymah in the week of September 7 to 13, versus 6 to 7 vessels per week for the prior three weeks, according to Vortexa data.

Rerouting through Hormuz

Saudi Arabia's options for maintaining exports have significantly narrowed following a drone attack that shut down its critical East-West pipeline last week. With that alternative pipeline route disrupted, possibly for up to a month, and shipping risks elevated around the Arabian Peninsula, Riyadh is seeking to move more crude through the highly contested Strait of Hormuz.

US Energy Secretary Chris Wright told reporters Monday that the US Navy is escorting a large number of vessels through the Oman shipping corridor in the Hormuz chokepoint. Those escorts could support increased Saudi shipments and bolster Riyadh's confidence in US naval protection.

Options market and stocks to watch

Watch for volatility across energy names as the pipeline outage stretches and physical premiums stay elevated:

XOM: Watch for bid on integrated majors as European refiners scramble for non-Saudi barrels.

CVX: Another major leveraged to firmer Brent and refining spreads.

BP and SHEL: European-listed majors most exposed to the dated Brent physical market and refining margins.

USO: Watch flow in the crude ETF for retail positioning as headlines develop, and monitor other news around Hormuz shipping risk.

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