For six months the most important piece of oil infrastructure in the world has not been the Strait of Hormuz. It has been the pipeline that let Saudi Arabia avoid it. That pipeline is now down, hit by a drone strike launched from Iraq, and Carol Ryan’s Heard on the Street column in Friday’s Journal makes the consequence plain: militants have blown up Saudi Arabia’s Plan B.
The East-West pipeline carries crude across the kingdom to the Red Sea port of Yanbu, which is on the wrong side of Hormuz from Iran — the whole point. According to the International Energy Agency, the measures taken to route oil away from the strait offset close to a fifth of the supply lost to its closure in July and August, and most of that rerouted volume went through this single line. It did more to hold crude prices down than the emergency stock release or the collapse in Chinese demand.
What is left is a convoy
The fallback is the shuttle service, and it works roughly as it sounds. Tankers leave the strait in convoy under U.S. military protection, usually at night, and transfer their cargo ship-to-ship onto another vessel waiting in the Gulf of Oman. Ships switch off their transponders, so nobody can say with confidence how much is getting out; traders estimate something like nine million barrels a day of crude and products.
It is not cheap. Producers pay $16 to $20 a barrel to compensate crews and shipowners for the risk of running the strait. Insurance can reach 10% of the value of the vessel and its cargo. And the equipment for ship-to-ship transfers is getting scarce, which is the kind of bottleneck that does not fix itself quickly.
Saudi Arabia had already reduced what it sent through the pipeline before the attack, after Houthi forces began targeting its ships in the Red Sea. August exports from Yanbu were 2.9 million barrels a day, down from an average of 5 million from March through July.
The reason to expect repair
Saudi Aramco has a genuine advantage here, and it is unglamorous: about 70% of the inputs for its operations are sourced locally — chemicals, wellheads, pipe. Rebecca Schulz, senior oil analyst at the IEA, told the Journal it has the deepest supply chain in the region and the best ability to repair assets, especially pipelines. Iraq and Kuwait depend far more on imported equipment and international service providers.
And the incentive is overwhelming. Oil is 55% of Saudi government revenue. In the second quarter, Aramco handed Riyadh roughly $50 billion in royalties, dividends and income taxes. A country that funds itself that way does not leave a pipeline down for long if it can help it.
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The market voted on Thursday, and it voted for repair. Brent settled at $104.82, down 1%, and West Texas Intermediate at $101.91, down 0.5% — a second straight decline, on expectations that Saudi Arabia restores flows and keeps shuttling in the meantime. That is after Brent spot touched $132 this week, against $90 at the end of August.
David Russell of TradeStation gave the most useful sentence of the week on this: although there is clearly a supply shortage, “we’re back to a spot where a clear bullish position on something like crude is no longer something that has a favorable risk-reward… At this moment in time, the next $10 could be just as easily up or down.”
That is exactly how the energy sleeve is being held. The position is Exxon Mobil (XOM), Chevron (CVX), Cheniere Energy (LNG) and Valero (VLO), owned as a hedge against the inflation a quarter point cannot reach — and held at weight, not added to, into a $100 print. Chasing crude at $102 when the December 2027 futures contract prices $72.75 is a bet on the war, not on the barrel. This desk does not take that bet with retirement money.