Oil prices moved higher on Monday after reports that Saudi Arabia’s East-West crude pipeline is expected to remain largely offline for three to five weeks for repairs following an attack last week.
The pipeline provides a route for Saudi crude from the Gulf to the Red Sea, bypassing the Strait of Hormuz.
HSBC analysts led by Kim Fustier described the outage as “a negative surprise” relative to their base-case assumptions. The bank had expected bypass infrastructure, including Saudi Arabia’s East-West pipeline and the UAE’s Abu Dhabi Crude Oil Pipeline, or ADCOP, to help offset disruptions affecting the Strait of Hormuz.
HSBC Estimates Temporary 6 Million Bpd Deficit
Saudi oil exports, which have increasingly been routed through the country’s west coast following restrictions around Hormuz, fell to approximately 3 million barrels per day in August from 4 million to 4.5 million bpd previously, according to the analysts.
HSBC said the removal of that volume for one month would represent approximately 90 million barrels of lost supply. The bank compared this with cumulative global inventory draws of more than 500 million barrels since February.
The analysts estimated that the global oil market could temporarily move into a deficit of around 6 million bpd between mid-September and mid-October.
HSBC described this as “the largest implied deficit since the start of the conflict.”
Repair Schedule Remains Uncertain
HSBC said logistics on Saudi Arabia’s west coast had already been affected before the latest pipeline outage, with loadings at Yanbu declining and some exports redirected north through Egypt’s Suez Canal and SUMED pipeline following the announcement of a Houthi blockade on July 20.
The analysts pointed to Saudi Aramco’s previous restoration work at the Ras Tanura refinery following an attack in March.
HSBC said “a key uncertainty is whether repairs could be completed sooner than 3-5 weeks.”
The duration of the outage will therefore be one of the factors determining its effect on Saudi exports and the global supply balance.
HSBC Attributes Refining Tightness Mainly to Middle East Disruptions
HSBC also addressed the causes of higher refined-product prices, differing from the US administration’s view that Ukrainian attacks on Russian refineries have been the main factor behind record US diesel prices.
The analysts said they continue to see “the Middle East shock as the dominant driver of the current refining tightness.”
According to HSBC, refined-product loadings from inside the Gulf have declined by approximately 3.4 million bpd, including 2.1 million bpd of diesel, jet fuel and gasoline.
HSBC Says Brent Could Reach $120 Under Stalemate Scenario
HSBC said the Saudi pipeline shutdown creates upside risk to its base-case oil price forecasts and increases the probability of what it calls its “Stalemate” scenario.
Under that scenario, the bank said Brent crude could potentially rise to $120 per barrel.
The analysts identified a partial restart of the East-West pipeline, loading activity at Yanbu and the pace of global oil inventory draws as indicators to monitor when assessing the supply outlook.