TD Securities’ Senior Commodity Strategist Ryan McKay reports that disruptions around the Strait of Hormuz and Bab El-Mandeb are significantly reshaping Saudi crude export risks and bypass capacity, with implications for oil supply tightness. According to McKay, up to 16-17 million barrels per day (m b/d) of crude flow through the Strait of Hormuz has been halted, with roughly 7 m b/d able to bypass the Strait. Saudi Arabia has approximately 5-5.5 m b/d of spare capacity compared to pre-war levels available on the East-West pipeline to export crude via the Red Sea. The East-West pipeline is running at full capacity, and Yanbu ports are showing 13 m b/d of scheduled crude loadings for export this week and over 5 m b/d next week. McKay notes that 70-75% of Yanbu exports could face disruption risk if the Red Sea sees Houthi interference, with 90% of Yanbu exports set to be loaded on VLCCs, and at least 80% likely heading to Asian markets or the Saudi Jazan refinery. VLCCs, when fully laden, cannot transit the Suez Canal, requiring transit through the Bab el-Mandeb Strait, which is exposed to Houthi threats. However, up to 2-2.5 m b/d of scheduled VLCC flows could avoid Houthi threats by heading north to the port of Ain Sukhna, utilizing the SUMED pipeline, whose capacity is 2.5-2.8 m b/d, to move oil to the Sidi Kerir terminal on the Mediterranean Sea. This path would likely avoid Houthi risks, but just over 2 m b/d seems to be the upper limit for this avenue [1].
ING’s Warren Patterson has revised the base case for global energy markets, abandoning an earlier assumption of a quick two-week disruption in the Strait of Hormuz. Patterson now expects severe disruption to continue into late March or beyond, with only gradual normalization through the second and third quarters. The new base case scenario assumes that Strait of Hormuz flows remain cut off until the end of March, with intense combat between the US-Israel and Iran continuing until then, followed by lower intensity strikes and signs of diplomacy allowing for gradual recovery in energy flows in the second quarter. Upstream production, refineries, and LNG facilities are expected to slowly ramp up as storage constraints ease, but near-normal flows are not anticipated until the start of the third quarter, assuming available pipeline capacity continues to be used for some oil to bypass the Strait of Hormuz. The most optimistic scenario sees supply back to near normal by May, while the most aggressive scenario projects continued disruption into April and beyond, with few signs of diplomacy and ongoing attacks on vessels navigating the Strait of Hormuz [2].
Both reports highlight significant risks to Saudi oil exports and global energy supply, with TD Securities emphasizing the vulnerability of Yanbu exports to Houthi interference and the limited capacity of alternative routes, while ING underscores the likelihood of prolonged disruption and higher energy prices as the base case for the market.
CONCLUSION
The ongoing disruption in the Strait of Hormuz is causing significant risks to Saudi oil exports and tightening global energy supply, with alternative routes offering only limited relief. Both TD Securities and ING expect these disruptions to persist, with ING revising its base case to anticipate higher energy prices and a gradual recovery only by the third quarter. Market participants should prepare for continued volatility and supply tightness in the coming months.