Europe Turns to US Oil as Saudi Pipeline Stays Offline

By
Right Patriots
-
0

European refiners are scrambling to replace Saudi crude with American barrels just as the United States holds its lowest emergency oil reserves in more than 40 years — a collision that could push prices higher for drivers at home.

Saudi Aramco told European refiners last Friday they’ll receive no crude in October under long-term contracts, Bloomberg reported, citing sources informed of the decision. The move applies to all European buyers.

Aramco declined to comment to the Daily Caller News Foundation. But six energy analysts told the DCNF that European refiners will now turn to American crude to replace part of those barrels — and at least one expects them to bid for American diesel and gasoline as well.

“U.S. products markets are already very tight, so any additional demand for U.S. gasoline or diesel will put upward pressure on prices.”

The Strategic Petroleum Reserve held 285 million barrels in the week ending Sept. 11 — its lowest level since 1982, according to the Energy Information Administration. That’s down about 130 million barrels since the week before the Iran war began. American refineries ran at 96.8% of capacity in the same week, and distillate stocks stood 13% below the five-year average.

The emergency release from the reserve that began in March has ended, so European demand for American crude “will also push crude oil prices higher,” Ellen Wald, a nonresident senior fellow at the Atlantic Council’s Global Energy Center, told the DCNF.

European refiners will look to replace September and October supplies with other crude or with gasoline and diesel, and the easiest sources are the United States or Africa, Wald added. “U.S. products markets are already very tight, so any additional demand for U.S. gasoline or diesel will put upward pressure on prices,” she said.

American prices move with the world market either way, Andrew Lipow, president of Lipow Oil Associates, told the DCNF. They are “set by the global benchmarks, whether it’s WTI or Brent,” he said, and the pipeline closure “is limiting the availability of oil to the market around the world.”

American drivers should not see much change so long as exports are matched by new production, Caleb Jasso, a senior policy adviser at the Institute for Energy Research, told the DCNF. “Since oil prices are tied to global production, not just domestic production, a country can’t fully isolate itself from price fluctuations.”

The United States is producing at record levels and will likely raise daily output again in 2027, which would let American producers “help cushion any supply shortfalls Europe may face,” he added.

Selling more American barrels abroad will not raise prices at home, Stuart Turley, president and CEO of Sandstone Group, told the DCNF. “Energy security starts at home, but your energy dominance is displayed through your exports.”

Cutting off exports “will mean absolutely nothing to the U.S. consumers” because the country’s fuel supply is divided into regional districts that do not depend on the barrels leaving the Gulf Coast, he noted.

American crude cannot replace the lost Saudi barrels one-for-one, David Blackmon, an energy analyst, told the DCNF. Most American exports are light, sweet crude from shale fields, while Saudi Arabia ships heavier grades that European refineries are built to run.

“Unfortunately, for Europe, that grade of crude is not a match for Saudi oil, which is made up of heavier grades,” he said. “Europe’s refiners may be able to offset some of their Saudi losses with U.S. imports, but they will need to find other sources to fill their total needs.”

Europe can get the barrels at a higher price, Lipow said. “We continue to export three to four million barrels a day of crude oil, and Europe would just be competing for those exports with refineries elsewhere in the world, namely Asia. So there are barrels available, they may get more expensive.”

Some crude from the Gulf of Mexico is sour — or high in sulfur — and could stand in for Saudi grades. Every European refinery can run some of the light American crude known as WTI Midland, but it’s just a matter of “how much” of its crude intake each plant can replace, which depends on its equipment, Lipow said.

American crude exports averaged 4.8 million barrels a day in the week ending Sept. 11, up from 3.4 million the week before. The Energy Information Administration said the figures “do not establish an export response to the reported disruption” because the reporting period ended one day after the attack.

The loss of Saudi cargoes is “another opportunity for American producers,” Jason Hayes, a senior research fellow in the Heritage Foundation’s Center for Energy, Climate and Environment, told the DCNF. American crude exports hit a record 5.6 million barrels a day in May, and light, sweet WTI Midland is “an ideal match for European refineries,” he said.

U.S. exports “can realistically cover a meaningful share of the European gap, and they can do it faster and more reliably than most alternatives,” he said.

Europe “will pay more and wait longer” for those barrels, Hayes said, with tankers taking two to three weeks from the Gulf Coast against about a week from Yanbu to Mediterranean ports.

European buyers “can be sure that those tankers will arrive, unmolested by Iranian-backed Houthi terror attacks,” he added.

The outage is “significantly impairing” Aramco’s ability to supply Europe, Wald said. The pipeline let Aramco load tankers on the Red Sea for the Suez Canal or Egypt’s SUMED pipeline to the Mediterranean, which was “especially important for European supplies” since Europe cut its purchases of Russian crude.

At least one pumping station appears to have been destroyed and others were damaged, Wald said. Initial repairs might restore “perhaps 1 or 2 million” barrels a day, but returning the line to full capacity would take “6 weeks or more,” she noted.

Energy Secretary Chris Wright told CNBC on Sept. 15 that the outage would be brief. “It’s still a detailed assessment, but I think it will be measured in days,” Wright said on the sidelines of a G20 energy meeting in Houston. The pipeline remained offline on Friday, Reuters reported.

Three pumping stations were damaged and repairing a station takes one to two months, Lipow told the DCNF, but Saudi Arabia can route oil around the damaged stations. “If Saudi Arabia is able to bypass that station, they could get the pipeline back in service much quicker, but at a reduced capacity,” he said.

Data platform Kpler said on Sept. 14 that a bypass around the damaged pumping station was serving as a temporary fix and that full restoration could take up to six weeks, according to Euronews.

Saudi Arabia has meanwhile increased sales from the Gulf side of the country. It has sold about 60 million barrels from its Gulf port of Ras Tanura for loading by ship-to-ship transfer at the Omani port of Sohar this month and next, trade sources told Reuters. Chinese and South Korean refiners are the top buyers, with some volumes going to India and Japan.

Europe is competing with Asia for the same replacement barrels, Turley told the DCNF. India is the swing buyer at the moment and Chinese refiners are buying again after losing discounted Iranian and Venezuelan crude, he said.

The 1,200-kilometer pipeline can carry up to 7 million barrels a day from Saudi Arabia’s eastern oil fields to the Red Sea port of Yanbu, letting the kingdom export without passing through the Strait of Hormuz, which Iran has largely blocked since the war began in February.

The line had been moving 2.6 million to 4 million barrels a day since late August. Saudi Arabia blamed drones from Iranian-backed militias in Iraq for the Sept. 10 attack and shut the entire line on Sept. 11 as a precaution, the Associated Press reported.

Damage to three pumping stations was more extensive than first estimated, and a prolonged shutdown could affect up to 4% of global oil supply, Reuters reported on Sept. 15.

Countries in the Organisation for Economic Co-operation and Development’s European group imported 577,000 barrels a day of Saudi crude in June, according to the International Energy Agency. Poland’s Gdansk received about 160,000 barrels a day this year and Lithuania’s Butinge 63,000. Together, the two ports took about 59% of Europe’s Saudi imports.

Orlen, Poland’s state-controlled refiner and Aramco’s largest European customer, has issued more than 10 tenders since Sept. 11 and sought WTI Midland and Kazakh CPC Blend alongside North Sea grades, Reuters reported. The company said on Sept. 16 that it had signed 16 additional deliveries from Norway, Britain, Algeria, Kazakhstan, Azerbaijan and “both Americas” and that its refineries are running at full capacity.

Cargo prices in Europe’s physical market topped $120 a barrel on Sept. 15 as the cancellations spread, Reuters reported. Brent futures settled at $108.75 and WTI at $105.83 that day — their highest closes since May 19. Brent fell 2.7% to $105.83 on Wednesday after reports of a partial restart, and futures fell more than $1 a barrel again on Friday on the restart reports and the Sohar sales.

American refineries have little room to run harder. They ran at 96.8% of capacity in the week ending Sept. 11 and processed 17.3 million barrels a day, according to the EIA report. ExxonMobil’s 275,000-barrel-a-day Joliet refinery outside Chicago lost power on Sept. 13 and processing resumed within hours after power returned.

The White House is weighing how to use the Defense Production Act to expand refining capacity, the DCNF reported Sept. 11. Expanding that capacity “is a top priority for the President and his energy team, who are evaluating concrete options to increase our refining capacity through regulatory reform, faster permitting, and additional investment,” White House spokeswoman Taylor Rogers said at the time.

Turley said fast-tracking expansion of existing refineries under that law is the quickest relief available to the administration, since only lower demand or more refining capacity brings down the price at the pump. Jasso said the episode argues for investment in more American refineries.

Hayes said the case for American supply holds only if Washington keeps exports open, and that talk of an export ban in Congress “could lead global markets to view American producers as unreliable.”

“America has the oil,” he said. “The challenge is whether we choose to produce it and move it to friends and allies or to hand the competitive advantage back to our strategic competitors.”

The Houthis reached Perim Island at the mouth of the Bab el-Mandeb strait earlier this month, the route Saudi tankers take south from Yanbu. The International Energy Agency put Saudi supply at six million barrels a day in August, down 2.3 million on the month and the lowest in more than three decades.

Saudi Arabia said on Sept. 16 that it expects to restore about half of the pipeline’s capacity in the coming days, and Aramco has not publicly confirmed the October halt.

RELATED ARTICLESMORE FROM AUTHOR