Crude pool drying up as Middle East conflict drags on, refiners wary

New Delhi: Indian refiners expect to bridge the immediate supply disruption from the shutdown of Saudi Arabia's crucial East-West oil pipeline using inventories, but are increasingly worried that a prolonged closure, widening conflict and fading prospects of a near-term resolution to the Iran war will make crude sourcing more difficult and costly.

"The situation looks grimmer than in the early weeks of the war. Then, there was hope of a quick resolution. Now, there is little visibility on how the conflict will unfold," said an industry executive, concerned about the intensifying Saudi-Houthi conflict, US refusal to attack the Yemeni grouping and the spectre of Saudi supplies disappearing from the market.

The concern is compounded by attacks on Russian ports that have disrupted crude exports and falling global oil inventories, which have reduced the buffer available to absorb further supply shocks.

Iran-aligned Houthis have been campaigning to block Saudi oil shipments through the Red Sea route, compounding the obstruction of the Strait of Hormuz.

Also Read: Saudi pipeline outage threatens loss of 4% of global oil supply

Price Pressures

This had already forced Saudi Arabia to cut production by about a quarter month-on-month to 6 million barrels per day (mbd) in August.

"Any further disruption to Saudi barrels would remove more supply from an already tight physical market, leaving buyers competing for an increasingly limited pool of alternative crude," said Nikhil Dubey, lead analyst, refining, at analytics firm Kpler. "This would add further upside pressure to crude prices."

The affected pipeline supplied Saudi crude to the Red Sea port of Yanbu, from where India has been receiving about 9% of its imports since the war began.

"Indian refiners would not only need to find replacement volumes, but also suitable crude grades that provide the right product yields (middle distillate heavy) to meet domestic demand," said Dubey. Refiners would be forced to turn to costlier alternatives, including higher freight, he said.

Also Read: New attacks in Hormuz and Saudi test nerves as war's spread worsens oil disruption

While waiting to assess the extent of damage to the Saudi pipeline, allegedly caused by drones sent by Iraqi militias, Indian refinery executives are concerned that attacks on Saudi energy infrastructure may not slow any time soon.

"Inventories have so far played a crucial role in balancing the market," the International Energy Agency said in its latest report, adding that since the start of the war, global observed oil inventories have fallen by 507 mb, equal to an average draw of 2.8 mbd.

Supplies have been squeezed owing to the conflict.

"With fewer barrels available on the water and disruptions becoming more widespread, refiners are facing a much tighter pool of replacement crude and increasingly difficult sourcing conditions," Dubey said.

Saudi Arabia has faced multiple setbacks over the last few days, including the attack on its pipeline, which had become a lifeline for its crude exports since the near closure of the Strait of Hormuz. Meanwhile, its rival and Iran's ally, the Houthis, have made strategic military advances by capturing a port city and an island off the coast of Yemen.