Gulf Oil Workarounds Keep Crude Flowing Through Iran War, but Costs Pile Up

When Iran closed the Strait of Hormuz at the start of the war, cutting off a route that normally carried about 15 million barrels of oil a day, the fear was that crude prices would surge and drag the global economy down with them. Nearly seven months later, that has not happened. Oil is costly, but not crippling, and analysts judge supply broadly sufficient for current demand — even as the higher prices create political headaches for U.S. President Donald Trump and other leaders.

The reason lies in a series of improvised workarounds. Saudi Arabia and other Gulf producers quickly turned to unused pipeline capacity. The kingdom's East-West pipeline carried oil to the Red Sea port of Yanbu, from where tankers sailed through the Bab el-Mandeb Strait toward Asia. The United Arab Emirates used its pipeline across Oman to Fujairah, skirting the strait altogether. Both routes had spare capacity, and Saudi Aramco and ADNOC used it to prevent exports from collapsing in the war's first weeks.

When Iran and its militant allies struck at those alternatives, exporters and the U.S. military found other options — workarounds for the workarounds — in what has amounted to a clandestine game of whack-a-mole. From May, ship operators willing to risk Iranian attack began using a U.S.-supervised corridor near Oman, defying Tehran's demand that vessels use its own vetted route. They moved at night with location systems and mobile phones switched off, transferring cargo to tankers waiting outside the strait. Flows from Kuwait, Iraq and the UAE began to recover.

That arrangement was disrupted in July, when Iranian-backed Houthi rebels in Yemen declared a blockade of Saudi oil shipments, threatening the Bab el-Mandeb. The Saudis redirected Asia-bound cargoes northwest to the Mediterranean, through the Suez Canal or, for tankers too large for it, a pipeline across Egypt to a second vessel. The oil then took a long detour around Africa and back to Asia. Earlier this month the East-West pipeline itself was attacked and shut down, potentially for weeks.

With loading halted at Yanbu from Sept. 11, the Saudis shifted again, joining other Gulf producers in sending oil through the U.S.-guided corridor in the Strait of Hormuz. On Monday, six supertankers loaded 12 million barrels at Saudi terminals on the Persian Gulf, according to shipping data firm Kpler.

U.S. officials have highlighted the southern corridor's role in keeping energy moving while their naval blockade tightens pressure on Iran's economy. Adm. Brad Cooper, head of U.S. Central Command, said in a social media video on Saturday that U.S. forces had assisted 2,000 commercial ship transits and the transport of more than 1 billion barrels of oil from Gulf partner nations over the past couple of months.

Analysts estimate that 6 million barrels a day or more have been moving through the strait on the dark shuttle route — roughly 40% or more of prewar flows. Rahul Choudhary, vice president of upstream research at Rystad Energy, calculates that with 6 million to 7 million barrels a day on the southern route, plus 2 million barrels through the Fujairah pipeline, about 8 million of the blocked 15 million barrels a day have been restored. That leaves roughly 7 million barrels a day missing from prewar levels. But about 3.5 million barrels a day are being drawn from global inventories, demand has fallen by perhaps another 5 million barrels a day because of higher prices and sluggish growth, and other suppliers such as the U.S. are adding 500,000 to 700,000 barrels a day. The market, Choudhary said, is "very tightly balanced" — which is why crude has stayed near $100 rather than touching $140 to $150 a barrel. Rystad expects oil at $85 to $90 in the final quarter of the year, falling to $80 to $82 next year if Hormuz reopens.

The workarounds, however, are slow and expensive. Routing oil to Asia via the Suez Canal instead of the Red Sea can add as much as a month to a voyage, while the Hormuz shuttle trade ties up costly tankers waiting at least a day and a half in the Gulf of Oman for ship-to-ship transfers. Charter rates, normally $30,000 to $50,000 a day, have soared; spot rates for Hormuz transits hit $1 million a day on Sept. 11, according to maritime data company Windward — equivalent to about $26 a barrel, making shipping a quarter of the cost instead of the usual 1% to 3%.

Markets are braced for further disruption. The attack on the East-West pipeline showed that pipelines are vulnerable, and Iran could try to disrupt the U.S. route through the strait or target the waters near Oman where transfers take place. If that happens, the fallback would be to move the transfers farther away — costing more time and even more money.