Saudi Arabia is now offering oil supply via this route
What's the story
Saudi Arabia is offering its long-term oil customers a new route for their April allocations, through the Red Sea port of Yanbu. The move comes as a precautionary measure against possible prolonged disruptions in the Strait of Hormuz. However, buyers opting for this route will only receive part of their monthly supply due to limitations on how much crude can be transported via the pipeline to Yanbu.
Supply options
Traditional route and its risks
The alternative route to Yanbu is the traditional Persian Gulf route. However, this comes with the risk of no oil deliveries if the Strait of Hormuz remains closed. Saudi Aramco, the world's largest oil exporter, had shipped 7.2 million barrels a day of crude last month before Iran effectively blocked Hormuz. Most of these exports were from its Gulf terminals at Ras Tanura and Juaymah.
Export limitations
Capacity concerns at Yanbu
Saudi Arabia has a five million barrel-a-day pipeline that stretches across the country to the Red Sea. However, it's unclear if Yanbu can handle this export capacity. The Saudis usually sell their oil under long-term contracts, mostly to Asia. But Sinopec, China's largest refiner, is reducing run rates by 10% due to shortages while Japan has started tapping into its national reserves.
Supply uncertainty
Uncertainty over Middle East conflict duration
The choices given by Saudi Arabia reflect the uncertainty over the duration of the Middle East conflict and when Hormuz might reopen. If the war continues, oil loaded at Yanbu for Asia shall likely be marketed on a delivered basis rather than being sold on a loading basis. The oil offered via Yanbu is only Arab Light grade, traders said.
Shipping increase
Increase in shipments via Yanbu
Aramco has been ramping up its shipments via Yanbu since the beginning of the war, now into its third week. The Saudi producer has also started offering crude loaded from the port via spot market tenders. However, this is the first time it is offering contracted supply from the Red Sea terminal. Beyond Asia, some European refiners have reported getting less contractual volumes of crude from Aramco.