Brent crude futures fell 1.9% to $101.94 a barrel during early European trading, while West Texas Intermediate (WTI) dropped 2% to $98.27 a barrel.
Oil prices declined for a fourth consecutive day on Monday, as improving shipping conditions in the Strait of Hormuz and a revival of diplomatic efforts related to the Iran conflict helped ease concerns over short-term supply disruptions. The risk premium embedded in oil prices is retreating alongside the normalization of vessel traffic near the strait.
Mitsubishi UFJ Financial Group (MUFG) noted that the rebound in Hormuz shipping activity, combined with a fresh round of diplomatic initiatives, is steadily removing the geopolitical risk premium from crude prices. However, the market remains vulnerable to further supply disruptions, given ongoing Saudi export constraints and persistent security threats in the Red Sea region.
Concerns over a prolonged shutdown of Saudi Arabia's East-West pipeline have also subsided. Citing sources familiar with Saudi Aramco's operations, reports indicate that the company could partially restart the pipeline within days. Technical challenges remain, though, and Aramco has already warned some customers in Europe and Asia of potential delays or cancellations in crude deliveries for September and October. The pipeline, which transports crude from eastern Saudi oil fields to the Red Sea port of Yanbu, serves as a critical alternative export route when Hormuz transit is constrained.
Following the pipeline damage, Saudi Arabia has grown increasingly reliant on Persian Gulf export terminals, shipping crude through the Strait of Hormuz. Data from energy analytics firm Kpler shows that Saudi crude loadings from Persian Gulf ports have risen by nearly 2 million barrels per day so far this month, reaching 2.46 million barrels per day. Meanwhile, ship-to-ship transfers in the Gulf of Oman have increased by 1.1 million barrels per day compared to August, climbing to 2.5 million barrels per day. This transfer model involves moving crude via short-haul voyages through Hormuz, then reloading onto larger ocean-going tankers near Oman for global distribution, reducing the need for large vessels to directly enter the Persian Gulf.
Kpler notes, however, that the UAE's Fujairah and Oman's Sohar ports, which handle the vast majority of regional transfer operations, are already running near full capacity. The rerouting of shipping lanes has also tightened the supply of large tankers. Clarksons Research data indicates that roughly 15% of the global very large crude carrier (VLCC) fleet is currently gathered off the coast of Oman. With many vessels deployed for short-haul transfers and longer routes, tanker freight rates are climbing. Clarksons previously recorded record-high crude freight rates during earlier periods of heightened Middle East shipping disruptions.
Security risks around Saudi Arabia remain elevated following a new wave of Houthi attacks over the weekend. Saudi state media reported that air defense systems intercepted multiple ballistic missiles aimed at cities including Riyadh. Three informed officials told media that an airstrike also targeted the jet fuel facility at Riyadh's King Khalid International Airport. The Houthis later claimed responsibility for attacks on Riyadh and Yanbu, the Red Sea oil hub connected to the East-West pipeline.
The tense security environment is also complicating Saudi crude exports via the Red Sea. Maritime intelligence firm Windward reports that more than a dozen Saudi-flagged vessels have chosen to reroute around the Cape of Good Hope in South Africa rather than transit the Bab el-Mandeb strait, adding roughly $1 million in costs per voyage. Alternative shipping routes are now crucial to Saudi export operations. Kpler states that ship-to-ship transfer capacity at Fujairah and Sohar ports is approaching its practical ceiling; if Persian Gulf exports continue to expand, more tankers will need to sail directly to Asian destinations or switch to less efficient transshipment points further east.