Saudi Aramco is canceling long-term contract crude supply to some European refineries for October. On Sept. 18, Bloomberg reported, citing people familiar with the matter, that Saudi Aramco had notified at least two European refining customers that they would not receive Saudi crude under long-term contracts in October.
The immediate cause of the supply disruption was an attack on Saudi Arabia’s East-West Pipeline, which runs to the Red Sea.
On Sept. 10, multiple pump stations along the pipeline were attacked by drones, after which Saudi Arabia took preventive shutdown measures. Crude loadings at Yanbu on the Red Sea were affected. The East-West Pipeline transports crude from Saudi Arabia’s eastern Persian Gulf producing region to the Red Sea and is an important route allowing Saudi Arabia to bypass the Strait of Hormuz. International Energy Agency data show the pipeline previously carried about 3.5 million b/d of crude exports.
Saudi Aramco is now trying to restore pipeline transportation. Reuters said the company plans to restore partial capacity within days and aims to restore full capacity in about six weeks.
European Refiners Scramble for Alternative Crude
European refiners typically receive Saudi crude under long-term contracts and take cargoes on a monthly contractual schedule. After the supply disruption, refiners need to seek alternative crude from other regions.
Polish refiner Orlen has begun supplementary purchases. On Sept. 16, Orlen announced it had bought 16 additional crude cargoes for its refineries in Poland, Lithuania and the Czech Republic, with sources including Norway, the UK, Algeria, Kazakhstan, Azerbaijan and the Americas.
Competition for alternative supplies has pushed up physical crude prices in Europe. On Sept. 15, Reuters reported that some European physical crude prices briefly topped $130/bbl, with North Sea Forties quoted at $136.75/bbl.
Therefore, the problem facing European refiners is not just the loss of some Saudi crude, but the need to re-procure in a situation of disrupted supply and limited alternatives.
Saudi Crude Diverted to Asia
While European supply is affected, Saudi Aramco is adjusting other export routes. Saudi Aramco plans to increase crude exports from Ras Tanura in the Persian Gulf in September and October, then ship them via ship-to-ship transfers near Sohar port in Oman. Exports over the two months are expected to be about 60 million barrels, equivalent to about 1 million–1.5 million b/d, with major buyers including refiners in China, South Korea, India and Japan.
After the pipeline shutdown, Saudi Aramco also began selling prompt crude to Asian customers, a supply it had previously offered less frequently, with some cargoes requiring pickup outside the Strait of Hormuz. At the same time, Persian Gulf crude is difficult to use to directly replenish the European market; shipping to Europe would require passing through the Red Sea or going around Africa, a voyage of up to nearly five weeks.
