Saudi Pipeline Shutdown Threatens 6 Million BPD Oil Deficit, HSBC Warns

A crucial Saudi Arabian oil pipeline will be shut down for three to five weeks for repairs following an attack, a development that could temporarily create a 6 million barrel-per-day global supply deficit, according to an analysis by HSBC.

A 'Negative Shock' to Supply

In a note to clients, HSBC analysts led by Kim Fustier described the disruption to the East-West Crude Oil Pipeline as an "unexpected negative shock." The pipeline is a strategic channel that allows Saudi Arabia to transport crude from its Persian Gulf fields to the Red Sea, providing a critical bypass to the chokepoint at the Strait of Hormuz.

The bank had previously assumed that such bypass infrastructure would act as a buffer against supply disruptions. The extended outage for repairs challenges that base-case scenario and introduces significant new risk into the global energy market.

Quantifying the Impact

Even before the shutdown, exports through the pipeline had been reduced to around 3 million barrels per day (bpd) from a typical 4-4.5 million bpd due to Houthi threats. HSBC estimates the potential fallout from the current disruption includes:

• A potential supply loss of 90 million barrels if the outage lasts a full month.
• The creation of the "largest implied supply deficit since the conflict began" during the mid-September to mid-October repair window.
• Aggravating an already tight market, where global inventories have fallen by over 500 million barrels since February.

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Price Risks and Refining Pressure

The pipeline closure adds significant upside risk to HSBC's oil price forecasts. The analysts noted it increases the probability of their more pessimistic "stalemate" scenario, in which Brent crude prices could rise to $120 per barrel.

HSBC also pushed back against the U.S. government's view that Ukrainian attacks on Russian facilities are the main cause of high diesel prices. The bank's analysts maintain that the "Middle East shock is the main driver" for tightness in the refining market, citing a reduction of 3.4 million bpd in refined product loadings from the Persian Gulf.

Context and Key Uncertainties

The situation on Saudi Arabia's west coast was deteriorating even before this incident, with loadings at the Yanbu port declining since a Houthi blockade was announced in late July. A key uncertainty now is the speed of repairs, though HSBC noted Saudi Aramco's proven capability for rapid recovery, as seen after a March attack on its Ras Tanura refinery.

Moving forward, market participants will be closely watching for a partial restart of the pipeline, loading dynamics at Yanbu, and the rate of global inventory draws to gauge the full impact of the disruption.