Militants have taken out what has arguably become the most important oil pipeline in the world.
A way to ferry crude through the Strait of Hormuz, along with Saudi Arabia's track record of fixing damaged infrastructure quickly, are now the best hope to cool oil prices.
Saudi Arabia was forced to shut down its East-West pipeline in recent days after it suffered a drone attack launched from Iraq, which is home to militants aligned with Iran. The pipeline has been a crucial shock absorber for the oil market since the outbreak of war.
According to analysis by the International Energy Agency, measures taken to reroute oil away from the Strait of Hormuz offset close to a fifth of the supply lost in July and August because of the waterway's closure.
Most of the bypassed oil went through the East-West pipeline, which played a bigger role in tamping down crude prices than the IEA's emergency stock release, or the collapse in Chinese oil demand.
Saudi Arabia had already curbed how much crude it sent through the pipeline before the attack, after the Houthis began targeting its ships in the Red Sea. In August, 2.9 million barrels of oil and refined products a day were exported from the Yanbu port on the country's west coast, data from the IEA shows. This was down from 5 million barrels a day on average from March through July.
Using a shuttle service to get oil out of the Strait of Hormuz may now be Saudi's next-best option. The U.A.E.'s state-owned oil company ADNOC has been using its own vessels and hiring ships to take crude out through the chokepoint. Oil tankers leave the strait in a convoy under U.S. military protection, usually at night. The oil is then unloaded onto another vessel waiting in the Gulf of Oman by a ship-to-ship transfer.
Estimates of how much oil is getting out of the Strait of Hormuz this way are all over the place. Ships turn off their transponders so the activity is hard to track. Commodities traders think around 9 million barrels of oil and refined products may be slipping out daily.
However, the shuttle service isn't cheap. Oil producers pay anywhere from $16 to $20 a barrel to compensate crew and shipowners for the risks of running through the strait. Insurance costs can be up to 10% of the cost of the vessel and cargo. Supply of equipment to do ship-to-ship transfers is also becoming tight.
Saudi Aramco has a knack for fixing damaged infrastructure quickly, which could also help to get oil flowing again. It has the deepest supply chain in the region and the best ability to repair assets, especially pipelines, according to Rebecca Schulz, senior oil analyst at the IEA. Around 70% of the inputs for its operations are sourced locally, including chemicals, wellheads and pipes. By comparison, Iraq and Kuwait are more reliant on imported equipment and international oil-field service providers.
The ramp-up in attacks on Saudi Arabia shows how vulnerable its energy infrastructure is. The country is "the bedrock of the global oil system and anything that happens there is of great importance," says Jim Burkhard, a vice president at S&P Global Energy. Oil prices in the Brent spot market shot to $132 a barrel this week, up from $90 at the end of August.
However, the Saudi government's reliance on oil for 55% of its revenues means the incentive to get crude flowing again is high. In the second quarter, Saudi Aramco handed Riyadh the equivalent of $50 billion in royalties, dividends and income taxes.
Militants have blown up Saudi Arabia's Plan B. The best option to keep oil flowing now looks like a return to the Strait of Hormuz.
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