Energy This Week | The National

Despite all the talk of the Strait of Hormuz being rendered worthless within two years, the last couple of weeks have shown how indispensable the waterway still is to energy flows. Saudi Arabia, which had been maintaining a viable trade through the western Bab Al Mandeb chokepoint, has turned to sending cargoes through the Strait of Hormuz once again. Currently, three-quarters of Saudi crude is being exported through the strait after the Houthis stepped up attacks and a drone launched from Iraq damaged the East-West pipeline, which had been critical to sustaining exports through Red Sea terminals. As of writing, Saudi Arabia is said to have restarted flows through its 7 million barrels-per-day capacity pipeline.

The US continues to call for de-emphasising the Strait of Hormuz. However, while new trade routes can reassure energy markets, they cannot fully replace flows through the waterway. In the case of the Gulf’s two chokepoints, both remain highly susceptible to blockades that can completely upend global shipping.

Meanwhile, oil tanker rentals are getting more and more expensive, with rates surging by a whopping 3,600 per cent, as my colleague Fadah Jassem writes.

Also, in this newsletter, I take a look at the legacy of the late US Senator Lindsey Graham’s sanctions campaign against Russia after President Trump signed a new act that will restrict Moscow’s energy exports to its biggest buyers.

Saudi Arabia’s months-long effort to route around the Strait of Hormuz is unravelling. About 76 per cent of tracked Saudi crude exports have passed through the waterway so far in September, up from barely 1 per cent in May, according to Kpler data.

1.7 million bpd: Saudi crude shipped through Hormuz this month, up from just 35,000 bpd in May
7.3 million bpd: volumes through the strait in February, before the Iran war

After Iran moved to close Hormuz after February 28, the kingdom sent almost all its exports west through the Red Sea. That strategy began to fall apart after the Houthis declared a blockade of Saudi ports on July 20, pushing Bab Al Mandeb flows down to 450,000 bpd in August from 2.4 million bpd in July. Then this month, a drone launched from Iraq shut the East-West pipeline, which had been carrying 4 million to 5 million bpd to Yanbu.

Bottom line: Saudi Arabia’s workaround has faltered, and now, three-quarters of its crude is back going through the strait it spent months trying to avoid.

Oil is flowing out of the Gulf again, but moving it has rarely been more expensive. As my colleague Fadah writes, supertanker earnings have hit record levels as disruption at Hormuz and Bab Al Mandeb forces vessels on longer journeys and into complex ship-to-ship transfers.

$642,000 a day: average spot earnings for very large crude carriers globally, up 40 per cent in a week, according to Clarksons Research
$845,000 a day: earnings on the Oman-to-South Korea route

Much of the squeeze comes from “shuttling”. Tankers carry crude out of the Gulf, sometimes with their tracking switched off, before transferring it to other vessels. Long waits for those transfers in the Gulf of Oman now tie up about 15 per cent of the global VLCC fleet, up from 10 per cent in early July. That means fewer ships are available for everyone else.

Bottom line: With freight from the US Gulf to China costing about $25 a barrel, shipping is becoming a bigger part of the oil price buyers actually pay.

Lindsey Graham spent more than a year trying to punish buyers of Russian oil. Two months after his death, his bill is law. President Donald Trump has signed the Lindsey Graham Sanctioning Russia and Iran Act, giving him the power to impose tariffs of up to 100 per cent on any of the five largest buyers of Russian crude or gas that “knowingly” book a new cargo. The problem is timing, as Isaac Arroyo and I write. With Gulf supply disrupted, Russian barrels have become increasingly important to Asia.

Nearly 50 per cent: Russia’s share of India’s crude imports in July, up from 18.7 per cent in February.
22 per cent: Russia’s share of China’s crude imports, up from 16 per cent.

India has already said it will take “all necessary measures” to protect its trade, while refiners are expected to seek exemptions or demand steeper discounts rather than abandon Russian crude altogether. There is also a risk that buyers rush to secure cargoes before any tariffs take effect.

Bottom line: Sanctioning Russian exports risks tightening the same oil market Washington is trying to keep supplied.

Chart of the week

Big number

The cost of shipping a single cargo of crude from the US Gulf to China, or about $25 a barrel, according to Clarksons Research.

These are tariffs imposed on countries that trade with a sanctioned country. The Graham Act, for example, does not tax Russian oil directly. Instead, it threatens tariffs of up to 100 per cent on goods from countries that continue to buy it.

September 30: US EIA petroleum status report
September 30-October 1: LNG North America Summit, Houston