Saudi Reroutes Oil as Capacity and Security Limits Emerge

Crude oil, tracked through the United States Oil Fund (AMEX:USO), slipped 0.75% to 117.98 dollars on Wednesday, sitting well inside its 52 week range of 102.42 to 143.78 as traders weigh a real supply story unfolding in the Red Sea. Saudi Arabia is rerouting oil away from its usual export corridors after a string of shipping threats has left the kingdom with fewer safe paths to market.

The trouble began when Iran's actions effectively shut down traffic through the Strait of Hormuz, the world's busiest oil chokepoint. Saudi Arabia responded by shifting Arab Light crude from its eastern Gulf terminals onto the Petroline, a pipeline with roughly 7 million barrels per day of capacity, sending volumes toward the western port of Yanbu on the Red Sea. That move briefly worked. Exports from Yanbu jumped to about 2.47 million barrels a day in the weeks after the shift, a 330% increase over prewar levels, based on figures from maritime intelligence firm Windward.

Why Saudi Arabia Keeps Rerouting Its Oil

By April, Yanbu was moving more than 4 million barrels a day, proof that the kingdom's alternate infrastructure could absorb a real shock. But the relief didn't last. Loadings at Yanbu fell to around 2.39 million barrels daily by June, a 41% drop from the March peak and a steep 66% decline from January's combined Gulf and Red Sea export total of roughly 7.96 million barrels a day, according to Wood Mackenzie.

Part of that slide traces back to a brief thaw at Hormuz in late June, when a ceasefire between Iran and the United States temporarily eased tensions there. That truce didn't hold. Missile strikes resumed and Hormuz tightened again. Windward's tracking showed just five tankers entering the strait on July 29, with only three making it out, a tiny fraction of normal traffic.

The Houthi Blockade Closes Off the Red Sea Option

Just as Yanbu looked like a workable backup, the Houthis in Yemen declared a blockade on Saudi vessels last week, forcing ships leaving the port to sail north rather than south to dodge the threat. Windward reported a dozen vessels at Yanbu recently, some running in dark mode with transponders off, plus two ship to ship transfer operations underway. Two LNG tankers were struck by drones in the Egyptian port of Damietta, a sign that even the newer northern route carries real risk.

That leaves Saudi Arabia with essentially one path left: the Suez Canal and the SUMED pipeline running to Egypt's Mediterranean coast. SUMED can only move 2.5 million barrels a day, and other nations have already claimed part of that capacity, according to Kpler. The Suez Canal itself is capped at about 1 million barrels a day. Windward has tracked at least three Saudi very large crude carriers hauling oil from Yanbu to the Egyptian port of Ain Sukhna for injection into SUMED, again sailing dark until nearing Suez. Tankers are also loading Saudi crude on the Mediterranean side at Sidi Kerir for delivery to buyers in Asia.

What Tighter Routes Mean for Prices and Supply

Kpler's analysts figure Saudi Arabia could theoretically push around half of its former East-West pipeline and Yanbu volumes through SUMED, but not the full amount. Physical capacity simply won't allow it. Unless the Houthis lift their blockade, something that looks unlikely for now, Saudi export volumes are set to keep shrinking in the weeks ahead.

There's a small counterweight. Traffic through Hormuz has ticked up again, still described by ING analysts as running

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