Saudi's main oil pipeline shut after drone strike, crude tops $107, India fears impact
A drone strike has shut Saudi Arabia's main East-West crude pipeline, pushing Brent crude past $107 a barrel and raising fears of higher fuel prices in India.
Military tension in the Middle East is now being felt across the world's energy market. Escalating tension between Iran and the US has already left the Strait of Hormuz in a near-shutdown state. Now Saudi Arabia has had to temporarily shut its East-West Crude Oil Pipeline after a major drone strike on it.
The pipeline, 1,200 kilometres long, is Saudi Arabia's only major alternative to the Hormuz route. Its closure has rattled international oil markets.
The pipeline carries about 4 to 5 million barrels of crude oil a day from the Arabian peninsula to the Yanbu port on the Red Sea, which is around 4 to 5 percent of the world's total daily oil supply. While shipping through the Strait of Hormuz was halted, Saudi Arabia had kept its exports running through this route. But a drone attack by Iran-backed groups in Iraq caused heavy damage to the pipeline's pumping station, and it is being said that the system could take several weeks to resume.
The pipeline shutdown has put heavy pressure on the reserve oil stocks at Saudi Arabia's Yanbu port. According to reports, the stock available at the port is enough for only 5 to 7 days of exports. Saudi Arabia may be managing for now using its additional reserves in Egypt, but these reserves will not be able to sustain a prolonged supply disruption.
Notably, this crisis has come at a time when Saudi Arabia had already cut its oil production significantly. Saudi's daily output in August stood at 6.2 million barrels, down from 10.9 million barrels in February. The fall in production combined with the closure of the main export route has put heavy pressure on OPEC+ countries to raise oil supply.
News of the Saudi pipeline shutdown sent stock markets and energy markets around the world into turmoil. Brent Crude prices rose to $107.81 a barrel, while US WTI crude reached $102.94 a barrel. Energy experts have warned that if shipping through the Strait of Hormuz and the Red Sea remains disrupted like this, crude oil could cross $120 to $125 a barrel in the coming days.
India imports more than 85 percent of its total crude oil requirement from abroad. So even a $1 rise in international crude prices pushes up India's import bill by thousands of crores of rupees.
If international crude prices stay above $105 to $110 a barrel for a long period, Indian oil companies (IOCL, BPCL, HPCL) will come under heavy pressure to raise petrol and diesel prices. This could push up domestic petrol and diesel prices by Rs 5 to 8 per litre. Costlier diesel will raise freight costs, which will directly affect the prices of vegetables, milk, grain and everyday goods, pushing up inflation. Costlier aviation turbine fuel (ATF) will also raise air ticket prices for airlines. Additionally, a rising import bill could further weaken the Indian rupee against the US dollar.
