The Red Sea just got more dangerous for Saudi oil

Every price on your screen is a claim about the world, and every claim rests on somebody’s ability to count the thing being priced.

Oil has always been the cleanest example of that. Barrels are physical, ships are enormous, and satellites are patient.

For two decades that combination made crude one of the most transparent commodities on earth. Tankers broadcast their positions, analysts counted the cargoes, and the International Energy Agency and OPEC turned those counts into the supply balances that eventually set the price of a gallon of gas in Ohio.

The system held up through the first five months of the Iran war, which began Feb. 28. The Strait of Hormuz shut. Saudi Arabia pushed crude west across its East-West pipeline to the Red Sea coast and kept shipping. Traders complained about the numbers, but they still had numbers.

Now they do not. Saudi crude leaving the Red Sea is vanishing from view because tankers are switching off their tracking signals to avoid Houthi attacks, and every recent loading at the port of Yanbu has been conducted dark, according to Reuters.

Tankers turn off AIS at Yanbu as Vortexa, Kpler, AXSMarine differ by 1.5M barrels daily.

gorsh13 / Getty Images

Why Saudi tankers are switching off their transponders

The Houthis declared a maritime embargo against Saudi Arabia on July 20, opening a new front against the United States and its allies. They have since claimed attacks on Saudi-linked tankers, the Yanbu oil facilities and the Jazan refinery on the Red Sea coast, reported Reuters.

Shipowners responded the way shipowners always do, which is quietly and immediately.

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“We’re not seeing any loadings with AIS on at the moment,” said Vortexa analyst George Morris, referring to the Automatic Identification System that broadcasts a vessel’s position.

About 70% of Saudi west coast loadings over the past few weeks were conducted dark, and every Yanbu cargo since July 23 has moved on a vessel without continuous coverage, said Kpler analyst Nhway Khin Soe.

I covered the Jazan refinery strike when it happened, and the lesson then was that refined products, not crude, were the immediate pressure point. The same campaign has now produced a second problem, and this one is about information rather than barrels.

Insurance told the same story faster than the tracking data did. War risk premiums for Red Sea transits surged roughly 150% to about 0.75% of a vessel’s value after the embargo was announced, reported Business Insurance.

What the tracking blackout does to oil prices

Here is where my analysis diverges from most of the coverage I have read this week. The news is not that Saudi exports are falling. The news is that nobody can prove whether they are.

In the week beginning Aug. 3, Vortexa put Yanbu loadings at 2.38 million barrels per day, down from 2.71 million the week before. Kpler saw a far sharper drop, to 1.78 million from 4.04 million. AXSMarine went the other direction entirely and calculated a rise to 850,000 barrels per day from roughly 420,000, according to Reuters.

I ran those three estimates against each other, and the spread is the whole story. The gap between the highest and lowest reading for one week of one port is more than 1.5 million barrels a day.

For scale, that spread is nearly as wide as the entire global supply shortfall now projected for this quarter. The world oil balance is expected to show a deficit of 1.8 million barrels per day in the third quarter, more than double last month’s estimate, according to the International Energy Agency.

Analysts were flagging this exposure before the transponders went off. Goldman Sachs held its Brent forecast steady last month while warning that the risks around it had tilted higher, TheStreet reported. At that point Yanbu loadings were still stable and still visible.

Put plainly, the measurement error is approaching the size of the thing being measured.

Where Saudi crude is going instead of the Bab al-Mandeb

Saudi Arabia has not stopped exporting. It has changed direction, sending more oil north through the Suez Canal or Egypt’s SUMED pipeline, which runs from Ain Sokhna on the Red Sea to Sidi Kerir on the Mediterranean.

The rerouting shows up clearly in the data that still works:

Traffic through the Bab al-Mandeb Strait fell to an average of 32 vessels a day last week from about 50 before the blockade, according to Kpler data cited by Reuters.
Crude and condensate loadings at Sidi Kerir averaged a record 2.17 million barrels per day last week, roughly 50% above the prior week, said Vortexa’s Morris.
About 90% of those Sidi Kerir volumes were Saudi crude, said Vortexa’s Morris.
Drones struck two liquefied natural gas carriers at Egypt’s Port of Damietta on July 30, and no group claimed responsibility, reported CNBC.

That last bullet matters more than its size suggests, because the northern route is not a safe harbor either.

Tanker operator DHT Holdings (DHT) used to exit the Red Sea southbound through Bab al-Mandeb after lifting oil. “That has become a bit more challenging as of late,” Chief Executive Svein Moxnes Harfjeld said on an earnings call, according to Reuters.

The knock-on effects are already moving through global trade. “We’re getting a domino effect here,” said Kpler’s Matt Smith, who expects European refiners taking more Saudi barrels to push West African crude toward Asia, according to CNBC.

What a blind oil market means for your portfolio

Brent settled at $88.98 a barrel Wednesday and West Texas Intermediate at $83.27, according to CNBC. Both eased on the morning of Aug. 13.

Those are not panic prices. They are the prices of a market that has decided the Red Sea disruption is manageable, based on data that three professional firms cannot reconcile with each other.

Earlier this summer, the oil spike everyone feared never showed up, largely because the workarounds kept functioning and the market could still verify that they were working. The verification half of that equation is now missing.

That is the risk retail investors keep underestimating. Volatility in oil no longer arrives only when a missile lands. It arrives when the estimates get corrected, all at once, weeks later.

The contradiction is already public. Energy Secretary Chris Wright said regional oil flows were averaging about 15 million barrels a day and had exceeded prewar levels, while Kpler said its vessel-tracking data could not be reconciled with those figures, reported OilPrice.com.

For anyone holding energy exposure, an S&P 500 index fund, or simply a car, the practical takeaway is uncomfortable but useful. The next big move in crude probably will not be announced by an attack. It will show up as a revision, buried in a monthly report, correcting a number the market has been trading on for a month.

Watch the reconciliation, not the headlines.