are falling by nearly 2 percent across both main benchmarks, and , for the third consecutive day.
The continued decline in oil prices comes alongside optimism about a rapid recovery of lost supplies from Saudi Arabia, given the absence of accelerated escalation between the United States and Iran in recent days, which has reassured the market that crude flows from the Middle East can be maintained.
After the targeting of a pumping point on the East West pipeline in the Kingdom and the export terminal at the port of Yanbu, concerns emerged about losing around 4 percent of global crude supplies, prompting reports of rerouting supplies toward the Strait of Hormuz. Reuters cited sources saying the Kingdom sold around 60 million barrels of oil for the current and coming months through the port of Ras Tanura and the Omani port of Sohar, located outside the strait, bringing crude flows back to last August’s levels or slightly higher. Furthermore, the Wall Street Journal reported, citing analysts at the International Energy Agency, that the Kingdom has the capacity to repair infrastructure and pipeline damage quickly, given its deep supply chains in the region, with 70 percent of inputs for these operations supplied domestically. Accordingly, this path helps push crude prices down from the recent peaks. At the same time, previous reports noted that returning the pipeline to service could be anywhere from days to weeks.
In addition, diplomatic efforts to defuse this war between the Kingdom and the Houthis may potentially bear fruit. Reuters cited sources stating that China asked Iran for help to urge the Houthis to de-escalate, following last week’s attacks and the rapid advance along the coast adjacent to Bab al Mandeb. However, Iran responded by saying that stability in the region depends on ending the US-Israeli war against it. In 2023, China achieved a diplomatic breakthrough when its mediation led to the restoration of relations between the Kingdom and Iran.
The United States may move toward refraining from escalation against Iran over the coming weeks until the midterm election is concluded. President Donald Trump taking action to escalate against Iran beyond securing the strait may involve nothing more than further energy price inflation, raising the political cost of this unpopular war, alongside the inability to achieve objectives in this short period after failing to achieve them over past months. Meanwhile, the price of diesel continues to set consecutive new record peaks daily since last week, approaching 6.5 dollars per gallon today on a national average level, according to American Automobile Association AAA figures. This burden is compounded by rising borrowing costs following interest rate hikes and .
In any case, the return of flows from the Kingdom to pre-escalation levels may mean nothing more than returning to the gray situation based on a formula of neither peace nor war in the Middle East, which could push oil prices to follow a wide sideways path witnessing sharp upward waves followed by sharp drops, similar to what occurred in previous escalation rounds. This state, characterized by the absence of full-scale war and the absence of lasting peace, remains dominant until the conclusion of the midterm elections and elections in Israel, which is sometimes referred to by the term ’strategic truce’ in Israeli media.
After these elections, and in the absence of hope for reaching a comprehensive diplomatic settlement ensuring agreement on all core unresolved issues, along with the prolonged duration of the war, the risks of full-scale regional war remain extremely high, carrying the possibility of attacks returning and intensifying to target oil production and export infrastructure throughout the region. This helps keep crude prices high, with the potential to extend the upward trend toward unprecedented peaks during this war. It is not ruled out, even within this period, that if escalation between the Kingdom and the Houthis is not defused and the situation deteriorates again, we will see further targeting of energy facilities.
Rerouting Saudi supplies toward the Strait of Hormuz and Oman creates other problems, namely increasing the cost of Iranian escalation and strengthening its dominance over the strait now responsible for offsetting lost supplies. The solution here lies in both Saudis and Houthis recognizing that this war will serve only the interests of parties seeking to expand their influence in the region, which are many.
Written by Samer Hasn, Senior Market Analyst at XS.com
