Oil prices jumped nearly 3% on Tuesday after shipping market sources said Saudi Arabia suspended crude loadings at its Yanbu export terminal on the Red Sea and Riyadh canceled some deliveries to European customers, deepening fears that disruption to a critical energy route could last for weeks.
The rally was sharper in US benchmark West Texas Intermediate crude, as investors turned to it as an alternative amid worries that the damage to Saudi Arabia's production and exports was spreading.
Brent crude rose $3.07, or 2.9%, to close at $108.75 a barrel, while WTI gained $4.44, or 4.38%, to settle at $105.83. Both contracts ended the session at their highest levels since May 19.
Yanbu becomes a critical hub after Hormuz closure
The port of Yanbu has taken on outsized importance for global energy supply chains since the war between the United States and Israel against Iran led to the closure of the Strait of Hormuz, a strategic waterway that had carried roughly one-fifth of the world's oil and liquefied natural gas supply.
That conflict forced Saudi Arabia to reroute crude exports westward through the East-West pipeline, a roughly 1,200-kilometre line that carries oil from the kingdom's eastern fields to Yanbu on the Red Sea coast, allowing tankers to load without passing through the Strait.
But attacks on the pipeline on Friday by Yemen's Iran-backed Houthi movement forced the kingdom, the world's largest crude exporter, to shut down the vital energy route.
Supply worries deepened after fresh Houthi attacks on Saudi Arabia on Monday, while Gulf states postponed talks that had been planned with Iran.
Shipping market sources told Reuters that loadings from the Yanbu terminal had been suspended, while earlier reports said Riyadh had told European customers that some crude cargoes due for late September would be canceled.
Traders bet on longer Saudi disruption
Andy Lipow, president of Lipow Oil Associates, said the cancellation of Saudi cargoes bound for Europe reinforced expectations that European refiners would turn increasingly to American supplies, a shift that was boosting WTI relative to Brent.
Traders were buying WTI contracts on bets that the disruption to Saudi exports would last longer than initially expected. Lipow said that because US refiners can switch relatively easily between different types of crude, demand for light, sweet crude such as WTI could rise further, adding more support to prices.
New problems in Libya
Separately from the Iran crisis, Libya is also facing production troubles. The state-run National Oil Corporation said operations at three oil fields had been suspended after members of the Petroleum Facilities Guard closed a valve on the Hamada-Zawiya crude export pipeline.
The security force warned that the shutdown could widen if its demands were not met. The National Oil Corporation said it might declare force majeure if the valve remained closed or if further fields were forced to halt production.
At the same time, continuing attacks on energy infrastructure in Russia and Ukraine pushed US diesel futures and refining margins to record highs.
Hamad Hussain, senior climate and commodities economist at Capital Economics, said the fresh Houthi attacks on Saudi Arabia might be shaping investor expectations about the severity and duration of the conflict.
Global supply risks mount
Buyers and traders said Saudi Arabia could exhaust its available crude export stocks within days if the East-West pipeline is not restored. The attack on the pipeline threatens as much as 4% of global oil supply.
Goldman Sachs said in a report that the latest repair estimates ranged from very soon to as long as eight weeks.
US Energy Secretary Chris Wright said on Tuesday on CNBC that he expected oil to begin flowing again through the critical Saudi pipeline within the next few days.
The attacks on energy infrastructure mark a significant escalation of the conflict and raise the likelihood that Brent could climb above $120 a barrel, according to Goldman Sachs. The bank's scenario is based on an estimate that average Gulf oil production in 2027 will remain 4 million barrels per day below pre-war levels.
Ship traffic through the Strait of Hormuz fell further. Preliminary data from Kpler showed only four vessels crossed the Strait on Monday, compared with ten the day before.
On the Russia-Ukraine front, both sides continued strikes on energy targets despite an announcement by US President Donald Trump that the two sides had agreed to stop. According to Reuters calculations, half of Russia's six largest diesel production units were forced in September to significantly cut output or halt operations entirely because of damage from drone attacks.
