Saudi pipeline outage sends physical crude and diesel into scarcity pricing

This divergence also helps explain the extreme backwardation seen across parts of the energy complex. Buyers are prepared to pay substantially more for crude and products today than for delivery further into the future, reflecting expectations that supply conditions will eventually improve but also the immediate need to keep refineries and distribution systems supplied.

Some relief is emerging through the Strait of Hormuz. According to Kpler data, the seven-day average of oil transit flows had risen to almost 12 million barrels per day by Sunday, the fastest pace since the June-July recovery. Importantly, there is now virtually no Iranian crude included in those flows following the US blockade of Iranian exports.

However, the improvement needs to be viewed in the context of the East-West pipeline shutdown. Saudi Arabia has lost its principal alternative route around Hormuz and is therefore increasingly dependent on getting barrels through the Strait. Additional Hormuz flows may consequently represent substitution for lost pipeline exports rather than a comparable increase in overall global supply.

Saudi Aramco has also begun offering additional crude through ship-to-ship transfers off Sohar in Oman as it attempts to mitigate the disruption. Until the East-West pipeline resumes operations, the market remains unusually exposed to further interruptions in either Hormuz or the Red Sea.

Diesel becomes the bigger problem

While crude is tight, refined products remain the epicentre of the energy squeeze. Diesel prices in both Europe and the US have surged to a record above USD 220 per barrel, with European gasoil and New York ULSD recently trading around twice the price of Brent crude. This year’s extraordinary backwardation has further amplified investor returns. The Bloomberg Commodity Index total-return components show European gasoil up around 232% year-to-date and NY ULSD around 203%, compared with roughly 117% for Brent.

The economic implications extend well beyond energy markets. Diesel is a critical input for road freight, agriculture, construction, mining and manufacturing, meaning sustained high prices eventually feed into transportation costs and consumer prices. US retail diesel reached a record USD 6.27 per gallon this week, while distillate inventories remain well below normal seasonal levels.

Export restrictions risk amplifying the squeeze

Scarcity is now also raising the risk of policy responses that could further fragment global product markets. 

In China, gasoline inventories at state-owned suppliers have fallen to their lowest level since 2022, while diesel holdings have dropped to a 15-month low. Energy Aspects sees an increasing risk that Beijing may restrict monthly clean-product exports during the fourth quarter as authorities prioritise domestic supply. Such a move has not been announced, but reduced Chinese exports would remove another important source of marginal supply from Asian and global markets.

Similar discussions are emerging in the US. Senate Majority Leader John Thune has said he is open to exploring a diesel export ban as domestic prices surge. While restricting exports could initially increase the amount of fuel available to US consumers, refiners warn it could ultimately prove counterproductive by weakening refinery economics while simultaneously removing US barrels from an already undersupplied global market.

The result is an increasingly unusual energy market. Brent near USD 110 signals considerable stress, but arguably understates the severity of the current physical squeeze. Dated Brent above USD 130 and diesel above USD 200 tell a much clearer story of immediate scarcity.

The next major signals will be the timing of repairs to Saudi Arabia’s East-West pipeline, the pace of flows through Hormuz and whether the surge in physical prices begins to attract additional Atlantic Basin supply into Europe. Until then, steep backwardation and exceptionally high refining margins suggest the market remains willing to pay a substantial premium for one thing above all else: barrels available today.