Saudi Arabia for the first time includes Red Sea oil in long-term contracts, offering buyers a "take it or leave it" choice to respond to the Hormuz crisis

The Strait of Hormuz crisis continues to escalate, with Saudi Arabia forcibly shifting the global oil supply chain to an alternative route.

According to Bloomberg on Monday, Saudi Aramco is officially offering long-term contract customers a choice: April oil quotas can be delivered via the Yanbu port on the Red Sea. This is the first time Saudi Arabia has included a Red Sea oil export option in long-term supply contracts.

However, buyers choosing Yanbu will only receive a partial monthly quota due to pipeline capacity bottlenecks; if they opt to continue loading from the Persian Gulf, they face the risk of the Strait remaining closed, resulting in no shipments. This “either-or” arrangement reflects market uncertainty about how long the Hormuz crisis will last.

This adjustment has a direct and profound impact on the global oil market. Japan has initiated a national strategic oil reserve release, while approximately 30 Very Large Crude Carriers (VLCCs) are heading to Yanbu port. Historically, the port’s average monthly arrivals are only about two ships, raising concerns about whether its capacity can meet the demand.

Pipeline Capacity Limits “Red Sea Option”

Last month, Saudi Aramco exported about 7.2 million barrels of oil daily, mostly through the Ras Tanura and Juaymah terminals in the Persian Gulf. Saudi Arabia has a pipeline running across the country directly to the Red Sea with a capacity of 5 million barrels per day, but Yanbu’s actual export capacity may be lower than this maximum.

According to informed traders, buyers delivering from Yanbu currently can only access Arab Light crude. If the conflict continues, oil shipped from Yanbu to Asia may be settled on a “FOB” basis—meaning Saudi Aramco will handle transportation logistics, rather than buyers arranging their own shipping as usual.

Asia Bears the Brunt, Europe Also Under Pressure

Long-term Saudi oil contracts are primarily sold to Asian buyers. Since the Hormuz crisis erupted, Asian refiners have been hit hardest. Sinopec has cut operating rates by 10%, and Japan has used its national reserves—both emergency measures to cope with supply disruptions.

Since the conflict began (now in its third week), Saudi Aramco has continued increasing shipments from Yanbu and has taken unusual steps by auctioning spot cargoes from the port. Including the Red Sea delivery option in long-term contracts marks a move from temporary measures toward institutionalization.

European refiners are also affected; some large European refineries report lower-than-expected contract quotas from Saudi Aramco, with one major refinery receiving no cargo in April and another receiving less than requested.

High Uncertainty Over Duration of the Crisis

The fundamental driver behind this supply chain restructuring is the high uncertainty about the future of the Hormuz crisis. Iran’s attacks on past ships and infrastructure have nearly halted all oil exports through the Gulf. Oil-producing countries like Iraq, Kuwait, and the UAE, whose Gulf storage facilities are nearing saturation, have already reduced production.

Meanwhile, U.S. President Trump’s shifting statements on the reasons for U.S. involvement make it difficult for allies and adversaries to gauge when the conflict might end; even if the U.S. intends to de-escalate, Iran has yet to show willingness to cooperate.

In this context, Saudi Aramco’s “either-or” offer essentially shifts the risk of uncertainty onto buyers—choosing certainty requires accepting a quantity discount; seeking full supply entails bearing the tail risk of no shipments.

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