Report: Saudi Arabia’s strategic maneuvers in the face of the Red Sea shipping crisis

With heightened Houthi hostilities against cargo vessels and sailors, the Kingdom benefits from its capability to bypass the Bab el Mandeb Strait in shipping energy supplies to Europe

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In the midst of escalating shipping disruptions in the Red Sea, a new report has shed light on Saudi Arabia’s Aramco circumventing the Houthi-led crisis, showcasing the oil giant’s resilience and strategic advantage.

Saudi Aramco’s ability to bypass the Bab el Mandeb Strait via its East-West Petroline provides a significant competitive advantage over regional competitors, according to a report by Kpler, which specializes in commodities market data and analytics solutions.

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This advantage makes Saudi crude more appealing, as it reduces the need for alternative, costlier routes such as circumnavigating the Cape of Good Hope.

The Houthis has since November been attacking vessels in the Red Sea, part of a route that accounts for about 12 percent of the world’s shipping traffic, in what they claim to be an effort to support Palestinians in their war with Israel.

The Houthi Red Sea attacks – which targeted commercial and international shipping for more than 40 times in the past three months – have disrupted global shipping and forced firms to re-route to longer and more expensive journeys around southern Africa. This has created significant challenges for international shipping routes, particularly those leading to the Suez Canal.

According to oil specialist Matt Stanley, a client liaison lead at Kpler, the disruptions in the Red Sea region have resulted in a 45 percent decrease in Suez Canal traffic, primarily impacting south-to-north movements, with Russian cargo ships persisting in utilizing the Red Sea route.

Stanley highlights last month’s Houthi strike on the Trafigura-chartered Russian naphtha cargo vessel that triggered a fire, emphasizing that while the incident is significant, it has not altered Russian oil transport patterns due to its intermediary nature.

The report emphasizes the shift in tanker routes for Middle Eastern crude to the Mediterranean or Northwest Europe, with a preference for the longer Cape of Good Hope route, leading to a supply chain crisis and increased transportation costs.

Stanley illustrates this, saying: “The journey of a Suezmax tanker from the Mideast Gulf around the Cape of Good Hope to the Mediterranean is currently around 57 percent more costly on a per-barrel basis compared to the Suez Canal route.”

Members of the Yemeni Coast Guard affiliated with the Houthi group patrol the sea as demonstrators march through the Red Sea port city of Hodeida in solidarity with the people of Gaza on January 4 2024. (File photo)
Members of the Yemeni Coast Guard affiliated with the Houthi group patrol the sea as demonstrators march through the Red Sea port city of Hodeida in solidarity with the people of Gaza on January 4 2024. (File photo)

Despite the conflict, Saudi shipments have been shielded from imminent threats, allow-ing Aramco to sustain crude deliveries from Ras Tanura and Juaymah to the kingdom’s western coast, serving the Jizan refinery, said Stanley.

“The Houthis have explicitly stated their non-targeting policy toward Saudi and Emirati vessels, despite the ongoing official conflict between these nations and the Ansarullah forces in Yemen, which notably saw decreased hostilities in 2023,” Stanley explained.

Even then, European supply routes for Saudi and Emirati crude have strategically cir-cumvented the Bab el Mandeb Strait.

“Despite ... the declaration of Saudi and Emirati cargoes as non-targets, the lone Saudi cargo directly en route to Europe this month, the Advantage Value, is navigating around the Cape of Good Hope. Similarly, three Emirati cargoes carrying Zakum and Murban crude, totaling 87 kbd for the month, are taking the African route to reach Le Havre and Augusta.”

The Advantage Value departed from Ras Tanura on January 7 and will arrive in Rotter-dam on February 17, which corresponds to a distance of 11,245 nautical miles (nmi) and a voyage time of 42 days. The usual route via the Suez Canal would only amount to 6,566 nautical miles (nmi) and 24 days (i.e. re-routing results in 18 extra days).

Stanley highlights the unique advantage of Saudi crude, stating: “Viewed through this new lens, Saudi crude emerges as possessing a significant competitive edge over its Middle Eastern counterparts, owing to its oil infrastructure.”

Kingdom’s competitive advantage

“The Kingdom benefits from the capability to bypass the Bab el Mandeb Strait in shipping to Europe – a strategic advantage not shared by its Iraqi or Emirati rivals. Notably, while Saudi Arabia’s crude is predominantly extracted from the eastern regions, primarily in the Sharqiyah (“Eastern”) province, Aramco effectively circumvents the strait by transporting crude via pipelines to its west coast refineries.”

Central to this advantage is the Kingdom’s East-West petroline, spanning 1,200km from the Abqaiq stabilization plant to the Yanbu refinery and export terminal on the Red Sea coast, allowing Aramco to bypass the Bab el Mandeb Strait for European shipments.

By utilizing pipelines to its west coast, Aramco efficiently transports crude to Europe via the shorter Red Sea route, reducing freight costs and mitigating security risks associ-ated with the Bab el Mandeb Strait, says Stanley.

For European buyers, the shorter transit time and reduced freight costs make Saudi oil an attractive option, narrowing the spread between pricing Basrah and Arab grades.

This reliability as a supplier further underscores Aramco’s favorable position in the market.

In the broader context of global oil production, Saudi Arabia’s recent decision to shelve plans for a 13 Mbd crude output capacity by 2027 signals a shift in priorities. While some interpret this move as a response to revised expectations for medium-to-long-term oil demand growth, others feel budgetary concerns may be at play.

Saudi Aramco’s decision to stay at 12 Mbd with its spare capacity aligns with the Vision 2030 economic diversification plan that seeks to reduce dependence on oil economy and instead focus on investments in non-oil sectors such as tourism, retail, and upcoming mega entertainment and leisure projects.

As Saudi Arabia takes a prudent approach to capacity, neighbors such as the UAE and Kuwait are actively investing to increase their production capacities.

The UAE, with its national oil giant ADNOC targeting a production capacity of 5 Mbd by 2027, continues to invest heavily in its oil-and-gas industry.

Kuwait, meanwhile, is eyeing a production target of 4 Mbd by 2035, and pursuing an interim capacity level of 3.2 Mbd by next year.

While the UAE and Kuwait gear up for increased production, Saudi Arabia’s decision to maintain its current capacity reflects a strategic pivot toward economic diversification and other upcoming mega projects, says Stanley.

“There is no immediate need for Saudi Aramco to ramp up capacity, given that the Kingdom is already producing at 3 Mbd short of the current capacity level of 12 Mbd,” he notes.

“While targeting 13 Mbd was initially more of a flex and a source of pride for Saudi Arabia’s Crown Prince Mohammed bin Salman a few years ago, priorities have changed with the Kingdom’s Vision 2030 economic diversification plan. Given the current spare capacity, investing in other areas of Saudi economy, such as tourism and its private sector, seems a much more prudent investment,” Stanley further explained.

“As part of its plan to diversify and appear more dynamic, the Kingdom also has several medium-term mega projects upcoming that it needs to invest heavily in, such as hosting the 2029 Asian Winter Games and the 2034 FIFA World Cup, as well as NEOM.”

As the dynamics in the region evolve, these contrasting strategies among key OPEC members are poised to shape the future landscape of global oil production.

Global flows of crude oil

The report also delves into the global flows of crude oil, highlighting how disruptions in the Red Sea have reverberated across different regions. Crude flows from the US Gulf Coast, West Africa, and Latin America to the East have seen declines, influenced by faltering Asian demand for Atlantic Basin crudes.

Notably, India’s crude imports have reached ten-month highs, driven by robust refinery runs over Q1.

Geopolitical tensions in the Red Sea have impacted arbitrage, influencing the crude sourcing strategies of countries like Japan and South Korea, which rely heavily on Mid-dle Eastern imports.

In the case of Europe, EoS crude flows faced challenges last November and December, but rebounded last month due to delayed tanker departures and a rerouting push from the Suez Canal to the Cape of Good Hope. Iraq played a significant role in this shift, with a notable decrease in Suez Canal transits for Iraqi exports to Europe.

The report also analyzes the dynamics of crude flows from Kuwait, highlighting a decline in crude exports while product outflows have increased. Kuwait’s Al-Zour refinery, despite facing operational challenges last November, has ramped up activity, contrib-uting to the country’s evolving export profile.

Red Sea a ‘prolonged crisis’

According to Stanley, what initially seemed a short-term challenge has evolved into a prolonged issue that is likely to persist for months.

In the report, he notes: “The Houthis have their own political agenda, although their will is officially entwined with the Israel-Hamas conflict. Despite efforts from the interna-tional coalition led by the US and the UK, future Houthi interventions and Iran’s backing remain undeterred.”

The leader of Yemen’s Iran-backed Houthis on Thursday said it will press on with attacks on Red Sea shipping in solidarity with the Palestinians as long as Israel continues to commit “crimes” against them.

“Our operations have a big impact on the enemy, which constitutes a great success and a real triumph,” Abdulmalik al-Houthi said in a televised speech. He said the group would continue to support the Palestinians despite US and British strikes on Houthi targets in Yemen in retaliation for the Houthi attacks on international shipping lines in the Red Sea.

Meanwhile, US Special Envoy for Yemen Tim Lenderking said in an interview with Al Arabiya English that Houthis will continue to be hit by US military strikes until they halt their attacks in the Red Sea.

“Those [US] strikes are very successful in degrading the Houthi military capability. The Houthis can keep doing this [continue with their attacks on vessels and mariners in the Red Sea], or they can stop and we can go back to peace,” he said.

With no end in sight to Houthi disruption and to retaliatory attacks by US forces and its allies, Stanley says: “The disruptions in the Red Sea region (will) continue to exert notable impacts on the oil market.”

Read more:

US strikes on Houthis will stop when Red Sea attacks end, senior diplomat says

Houthis say will continue attacks on Red Sea shipping in solidarity with Palestinians

Houthi Red Sea attacks soar by 500 pct, spark global shipping crisis: Experts