Saudi Aramco Zeroes Out European Term Crude for October as Dated Brent Tops $130

Saudi Aramco has told European term customers they will receive no Saudi crude in October. At least two European refiners were told their October allocations are zero, Bloomberg reported on September 18, and people familiar with the decision said it applies to all European term buyers. The East-West pipeline had been moving 4 million to 5 million barrels per day across the kingdom to Yanbu, bypassing the Strait of Hormuz, from where crude could reach the Mediterranean through Egypt's SUMED system to Sidi Kerir. With the pipeline damaged, that route is closed, and Aramco is targeting a return of about half capacity within days while full capacity is unlikely for another six weeks.

Aramco has since sold about 60 million barrels from its Persian Gulf export terminal at Ras Tanura for September and October loading. Those barrels will move through Hormuz and undergo ship-to-ship transfers near Sohar, Oman, putting roughly 1.0 to 1.5 million barrels per day of Saudi Gulf exports back into the market with buyers in China, South Korea, India and Japan rather than Europe. Brent was trading around $104.30 on September 18 with WTI near $102, well below Brent's move above $108 earlier in the week. Dated Brent, the benchmark for physical European crude, topped $130 this week, and Poland's Orlen has been buying North Sea barrels and seeking US and Kazakh crude after Saudi September cargoes were delayed or cancelled.

Refined products are the tighter leg of the complex. Kpler's Matt Smith told CNBC on September 17 that oil prices have risen roughly $30 per barrel since early August, and Kpler estimates about 8.5 million barrels per day of production has been lost over the course of the conflict. Refinery runs have also been cut sharply, reducing the gasoline and diesel produced from the crude that remains available. The Middle East normally exports about 3 million barrels per day of refined products, while Russia, the world's second-largest diesel exporter behind the United States, is simultaneously losing refinery output to Ukrainian drone strikes and restricting fuel exports.

Shipping remains the swing factor for physical barrels. Only three commercial vessels transited Hormuz on Wednesday September 16, compared with 12 on Tuesday and a 10-day average of 17, according to ship-tracking data cited by Reuters. US diesel prices are already above $6 per gallon, raising costs for trucking, agriculture, construction and manufacturing. Smith expects crude to keep grinding higher without a de-escalation, and said diesel does not get fixed very easily because the constraint is refining capacity rather than crude availability.