Saudi Oil Pipeline Attack: Why Your Gas Bill Might Spike

Saudi Aramco has told European refiners they will receive no Saudi crude in October, after drone attacks shut down the kingdom's East-West pipeline. The Saudi oil pipeline attack, first reported in detail by Bloomberg on Friday, extends a supply cut that began with canceled September cargoes. Europe now has to replace those barrels in an already tight market.

The attack struck three pumping stations on the pipeline on September 10, according to market reports. Since the Saudi oil pipeline attack, no crude has left the Red Sea port of Yanbu since September 11. The 1,200-kilometer pipeline, also known as the Petroline, normally carries between 5 and 7 million barrels a day from Saudi Arabia's eastern oil fields to the Red Sea coast. It lets tankers load at Yanbu and skip the Strait of Hormuz, which has been disrupted by the wider conflict between the US and Iran. The Saudi oil pipeline attack is the latest shock to the region's security picture, following moves like Washington's approval of a $24.3B F-35 sale to Saudi Arabia.

The attacks have been linked to Iraqi militias, with possible Houthi involvement, market reports say. The shutdown lands at a difficult moment. Shipping through the Strait of Hormuz, the other main route for Gulf oil, is already squeezed by the fighting, which leaves Europe with few easy ways to replace the barrels it is losing.

The October cutoff, explained

European refiners normally buy Saudi crude on term contracts that deliver steady monthly volumes. This week After the Saudi oil pipeline attack, Aramco notified at least two European refining customers that their October allocations were zero, and people familiar with the decision told Bloomberg the zero allocation applies to all European term buyers. Anadolu Agency confirmed the report, citing people familiar with the matter who said the decision covers all European buyers. Saudi Aramco did not respond to a request for comment. Some late-September cargoes were already canceled or pushed back to November.

On average, European countries imported an average of 577,000 barrels a day of Saudi crude in June, according to the International Energy Agency's Oil Market Report. The most exposed buyer is Poland's Orlen, which sources about 40 percent of the feedstock for its three refineries from Saudi Arabia. Orlen has issued more than 10 tenders for replacement cargoes since the attack, traders say, and has been buying North Sea grades to fill the gap.

Asia gets the workaround, Europe does not

Saudi Arabia is not cutting production. This is a routing problem, and the workaround favors Asia. To offset the Saudi oil pipeline attack, Aramco has sold roughly 60 million barrels from its Persian Gulf export terminal at Ras Tanura for September and October loading. Those barrels move through Hormuz and undergo ship-to-ship transfers off the port of Sohar in Oman. Buyers in China, South Korea, India, and Japan are getting the oil.

Europe is on the wrong side of the fix. Gulf barrels headed west would have to clear Hormuz and the Red Sea, where shipping has also come under attack, or spend nearly five weeks sailing around Africa. That is why European physical crude is repricing so fast, while futures move less. Aramco is working to partially restart the pipeline within days and return it to full capacity within six weeks, Bloomberg reported. Until then, European refiners keep bidding for scarce barrels.

What the Saudi oil pipeline attack means for prices

Brent crude futures traded around $104.30 a barrel on Friday, after briefly climbing above $108 earlier in the week. Because the Saudi oil pipeline attack knocked out Europe's main workaround route, physical prices tell a harsher story. European cargo prices climbed toward $122 a barrel, and Dated Brent, the benchmark for physical European crude, topped $130 this week. The gap between the paper price and the price of actual deliverable barrels reached about $14, a sign of how tight the real market has become.

"The market is being asked to price a supply gap with no end date attached to it," Natasha Kaneva, head of commodities research at JPMorgan, told clients on Thursday. Her team holds no baseline oil forecast, she said, because it cannot model how the standoff resolves.

Drivers will feel the squeeze at the pump. Global shocks keep landing in household budgets, and until the pipeline is repaired, the Saudi oil pipeline attack will keep fuel markets on edge. When refiners pay more for crude, they pass the cost along, and countries that lean on Saudi barrels will feel it first. Italy is already deploying warships to protect its commercial vessels through the Bab al-Mandeb strait, its defense minister said. The full market picture is still developing, and the details keep shifting as refiners scramble for replacement barrels. OilPrice.com has been tracking the cutoff and the rerouted Gulf cargoes as the story develops.