Saudi Arabia in talks to formalize Hormuz oil shuttles

Saudi Arabia is negotiating with customers to load oil outside the Strait of Hormuz under long-term contracts starting next year, Bloomberg reported on Thursday. The deal would make permanent a stopgap shipping system the kingdom has relied on since the Iran war began.theedgesingapore+1

The talks are ongoing and must wrap up by the end of the year, according to people familiar with the matter. Long-term contracts account for most of Saudi Arabia's crude supply, so an agreement would change how the kingdom gets its oil to buyers. No final decisions have been made. Pricing, freight and eligible volumes are still being discussed, and neither Aramco nor the Saudi Energy Ministry responded to requests for comment.bloomberg+1

How the shuttles work

Before the war, Aramco's main Asian customers sent their own tankers to collect crude at the Ras Tanura terminal, deep inside the Gulf. The Saudi company was generally not involved in arranging the shipping. Now in its eighth month, the war has severely disrupted traffic through Hormuz. Some shipowners have refused to enter the strait, and buyers have struggled to find tankers at a reasonable cost.theedgesingapore

That gave rise to a shuttle system now used by the United Arab Emirates, Saudi Arabia, Kuwait and Iraq. Under it, the seller often takes on the risk of passage and moves cargoes onto other vessels outside the waterway through ship-to-ship transfers. Aramco has used the shuttles to supply its Arab Light, Medium and Heavy grades. It has also recently allowed some buyers to carry out transfers off the coast of India, the people said.theedgesingapore

Pricing and delivery options

State-run Saudi Aramco is also discussing other changes, including letting buyers choose a pricing benchmark and delivering cargoes all the way to customers in Asia. Some Asian buyers want to price their contract purchases against Brent futures rather than the Dubai and Oman benchmarks. That would be a new degree of flexibility from the Gulf producer. Arranging more of the shipping itself could also let Aramco capture some of the gains from the soaring cost of hiring ships to cross Hormuz, according to the people.theedgesingapore

The shipping trade publication TradeWinds framed the plan as an effort to formalise the strait's very large crude carrier shuttle trade, which could be good news for shipowners.

A tense backdrop

The talks come as attacks on Saudi energy infrastructure continue. On October 5, the Houthis reportedly struck the Ras Tanura refinery with missiles, and AFP reported that pumping on the East-West pipeline had been halted again. Crude prices climbed on Thursday, with Brent above \$104 a barrel, on reports that President Donald Trump may order strikes on Iran before the midterm elections.newsquawk+1

Market analysts at Newsquawk cautioned that, as an unconfirmed report of talks, "the signal is provisional".newsquawk