Oil rises on Hormuz risks as Saudi crude flows rebound

Saudi-to-China crude voyage costs rise from $4.5M to $63M

Oil futures advanced in early European trading on Tuesday as continued threats to shipping through the Strait of Hormuz kept Middle East supply concerns in focus, while investors weighed the prospect of diplomatic movement on the Iran conflict at this week’s United Nations General Assembly.

Brent crude rose 1.7% to $102.07 a barrel. West Texas Intermediate gained 1.7% to $97.4 a barrel in the same session. Markets are balancing Middle East supply risks against the possibility of resumed U.S.-Iran diplomacy, said Lukman Otunuga, head of market research at FXTM. Renewed escalation could push crude prices higher, while confirmation of direct U.S.-Iran talks at the U.N. General Assembly could weigh on prices by raising expectations for increased regional supply, Otunuga said.

U.N. Secretary-General Antonio Guterres has played down the prospect of talks taking place in New York, saying dialogue between the U.S. and Iran is essential but would probably take place elsewhere.

The shipping backdrop has remained tense. A tanker entering the Strait of Hormuz was struck by a projectile on Monday, injuring two crew members, while another tanker was hit by debris, according to U.K. Maritime Trade Operations.

Even as those incidents occurred, the volume of oil, natural gas and cargo passing through the strait over the past two weeks reached its highest level in six months, U.S. Central Command said.

Saudi Arabia has increasingly relied on Hormuz since shutting its East-West Pipeline earlier this month as a precaution after attacks in the Riyadh and Medina regions, the Saudi Press Agency said. The pipeline carries crude from the kingdom’s eastern oil fields to the Red Sea port of Yanbu.

Around 2.4 million barrels a day of Saudi crude and condensate flowed through the strait over the past two weeks, returning to levels last seen in early July, according to data from Kpler. The four-week average of Saudi crude loadings from inside the Persian Gulf rose above 2 million barrels a day last week, up from virtually zero for most of June and less than 1 million barrels a day in July, according to Vortexa.

Saudi Aramco has been loading more crude at its Persian Gulf terminals and moving it through Hormuz before transferring some cargoes to tankers off Oman for delivery to customers. The company has told several Asian customers to pick up shipments off Oman, The Wall Street Journal reported, citing people familiar with the matter.

The increased reliance on ship-to-ship transfers is straining tanker availability. Gulf of Oman ship-to-ship activity has surged to record levels, while capacity constraints could force more transfers toward western India or Malaysia, Kpler said.

Kpler estimates that redirecting 3 million barrels a day of Saudi crude would require an additional 36 to 40 very large crude carriers under its base case. Moving transfers as far as Malaysia could require as many as 58 VLCCs, compared with around 25 if the additional barrels were handled in the Gulf of Oman.

The cost of moving Saudi crude has jumped in tandem. The cost of shipping crude from Saudi Arabia’s Ras Tanura terminal to Ningbo in China has risen to nearly $63 million per voyage from around $4.5 million before the conflict, said Michael Haigh, head of commodities research at Societe Generale.

Saudi-flagged vessels have also stopped transiting the Bab el-Mandeb Strait following attacks by Yemen’s Iran-backed Houthi rebels on Saudi-linked shipping, and more than a dozen Saudi vessels have rerouted around South Africa’s Cape of Good Hope, according to maritime-intelligence firm Windward.