What next as Saudi Arabia scrambles to restore East-West pipeline

The global oil market is running out of safety nets. Prices are unlikely to fall below $100 per barrel anytime soon, analysts said, with traders increasingly pricing in a significant loss of regional supply as Saudi Arabia scrambles to restore a crucial pipeline.

Saudi Arabia’s closure of the East-West pipeline, a highly strategic network that transports crude oil from Abqaiq on the kingdom’s eastern Gulf coast to the port of Yanbu on the Red Sea, has put 4 million barrels per day at risk and driven a sharp spike in crude prices.

The development is more bad news for consumers — and comes against a backdrop of renewed hostilities between the U.S. and Iran, a lightning ground offensive by the Iran-backed Houthis along the Red Sea coast and a fresh wave of attacks on Saudi Arabia, the world’s largest crude oil exporter.

Analysts have emphasized that the clock is ticking for Riyadh to repair what appears to be significant damage to one of the East-West pipeline’s pumping stations, warning that the longer the shutdown, the bigger the price shock.

“The broader Middle East conflict is already putting a premium on crude, and the loss of Saudi Arabia’s East-West pipeline adds another major constraint,” Janiv Shah, vice president of oil markets for Rystad Energy, said in a research note.

“The relatively contained price reaction suggests the market still expects Saudi inventories to cushion exports in the near term, but if the disruption extends beyond the five-to-seven-day inventory cushion, that could change quickly,” Shah said.

International benchmark Brent crude futures for November expiry rose 2% to $107.82 per barrel on Tuesday morning, extending gains after jumping more than 21% over the past month.

U.S. West Texas Intermediate futures for October expiry, meanwhile, traded nearly 2.2% higher at $103.58. The contract, which is up over 25% over the past month, surpassed $100 for the first time since May last week.

Saudi Arabia on Friday temporarily closed the East-West pipeline as a precautionary measure following multiple attacks by drones launched from Iraq. Several people were injured in the strikes, the Saudi government said, with drones targeting a key stretch of the pipeline in the Riyadh and Medina regions.

Saudi Arabia has relied on the East-West pipeline to shift crude exports away from the strategically vital Strait of Hormuz as fighting continues between the U.S. and Iran. The roughly 750-mile system is estimated to have a total design capacity of 7 million barrels per day, following recent expansions.

Ample global inventories and stockpiles have historically acted as a crucial buffer to keep a lid on oil prices during previous crises. However, analysts have raised the alarm in recent weeks that these safety nets are rapidly evaporating due to the ongoing Middle East conflict.

Inventories have already been drawn down by around 1 billion barrels, according to Paul Gooden, head of natural resources at investment manager Ninety One.

“We’ve likely got another ~1bn to go before we hit tank bottoms, so we still have breathing space,” Gooden told CNBC by email. “But every day Hormuz stays closed the oil market tightens, and the risk is asymmetrically to the upside.”

Satellite images showing the extent of the damage to the East-West pipeline have prompted some to conclude it could a long time to repair, with Andy Lipow, president of Lipow Oil Associates, suggesting it might take months. Riyadh has not yet disclosed the number of affected pumping stations or a restart timetable.

The damage to the pipeline and delays to its repair “underscore the growing feedback loop from the regional conflict,” according to Torbjorn Soltvedt, principal Middle East analyst at risk intelligence company Verisk Maplecroft.

“Attacks on energy infrastructure and tankers are constraining oil exports, while the resulting disruption to shipping more broadly is delaying the import of parts needed to restore the only major alternative route bypassing the Strait of Hormuz,” Soltvedt said in a research note.

The attack on the East-West pipeline has removed an export route carrying more than 4 million barrels per day, which will now need to be routed through the Strait of Hormuz, Soltvedt said, noting that daily volumes through the waterway are volatile and typically average only around half of their pre-conflict levels.

It took just a few days for Saudi Arabia to restart the East-West pipeline the last time it was attacked, although the damage does appear to be “more serious” this time, according to Laura James, deputy director and senior Middle East analyst at Oxford Analytica.

“But even, of course, once the pipeline is restarted, we still have the problem of the Bab el-Mandeb and whether oil can get out that way,” James told CNBC’s “Access Middle East” on Monday.

James said it looks “increasingly likely” the whole Red Sea route might come under threat because of pressure from Iran to stop any oil coming out of the region.

“The thing I’d add to that though is that the Gulf countries do seem now to be seriously mobilizing among themselves, saying this is a problem we actually have to fix.” Indeed, a postponed meeting between Oman and Iran that had been scheduled for Monday may actually suggest that “there are more serious preparations going on within the Gulf,” James said.

— CNBC’s Spencer Kimball contributed to this report.