A pipeline and high oil prices are carrying Saudi Arabia through the shipping war. Both are one closure away from failing

Saudi Arabia’s budget deficit narrowed sharply in 2Q, even as the war ground into its fifth month, a result that makes sense only if you follow the crude. With the Strait of Hormuz shut, the Kingdom pushed about 5 mn bbl / d of oil exports west through the East-West Pipeline to the Red Sea port of Yanbu, and higher prices did the rest, S&P Global Ratings head of Emerging Markets Credit Research Zahabia Gupta tells EnterpriseAM. Strip out that single workaround, and the fiscal picture looks very different.

A more useful way to read the Red Sea disruption is as a sorting mechanism, not a blockade. The Houthis have threatened to close the Bab Al Mandab strait, Saudi Arabia’s second maritime outlet after Hormuz, but the escalation so far has been about “which ships get through and which do not,” rather than a direct hit on Saudi oil, geopolitics and geoeconomics analyst Celine Bteish tells us. Chinese-chartered vessels carrying Saudi crude moved through unimpeded last week, she says, while other traffic stayed exposed.

Two cushions explain the calm. The first is price. With a market consensus of USD 85-90 a barrel holding through the end of 2026, “the price is compensating for the volume,” Bteish says, even as less crude moves through the pipeline than before the war. The second is the balance sheet: spreads on Saudi debt sat only 30 to 40 basis points above pre-war levels, Gupta says, which she puts down to the Kingdom’s net asset position of roughly 50% of GDP. “It’s those buffers that give them that resilience,” she adds.

Why it matters

The workaround has a single point of failure. The 2Q improvement rode on Yanbu and Petroline staying open while Hormuz was closed. Obstruct Bab Al Mandab at the same time Hormuz stays shut and the effects can “really layer up,” because the Suez Canal cannot absorb a wholesale rerouting and the alternative around southern Africa is slower and costlier, Gupta says. More than 60% of Saudi exports are bound for East Asia and East Africa, and those routes now lean on a strait that “cannot be fully substituted,” S&P economist Valerijs Rezvijs tells us.

A new maritime coalition will not, on its own, change the math. Riyadh’s move to stand up a multinational force to protect Red Sea shipping does little for investor sentiment. “Not by itself, as long as the conflict continues,” Gupta says. Even US naval escorts got some ships out without really lifting flows during the peak phases. Talks between Washington and Tehran are due to resume, but “a big trust deficit between the key parties” makes a broad settlement soon unlikely, according to Gupta. The last nuclear agreement took around 18 months to negotiate.

Beyond crude, the exposure runs through chemicals and transport. Petrochemicals are Saudi Arabia’s second-largest export industry after oil and gas, at 10-15% of the total. They are squeezed both by feedstock costs and by an oil-production rate that Rezvijs estimates is running about 40% below its February level. Customs revenue fell some 24% y-o-y in 2Q, Gupta says.

Working the other way, “rising disposable incomes resulting from recent labor market reforms" and the consumer spending that follows “are likely to continue supporting non-oil economic activity,” Rezvijs argues.

BACKGROUND- The cushioning started before the shooting. Saudi Arabia had already begun trimming its gigaproject pipeline and tightening fiscal discipline ahead of the war, as Bteish and Rezvijs note, which softened the blow. Rezvijs cautions that a prolonged conflict could force further project scale-backs.

The most durable mark is on defense. “This war will scar the region for a very, very long time,” Bteish says, and the clearest evidence is in how Riyadh now approaches a security posture long underwritten by Washington. The share of defense spending going to domestic production has climbed from 4% in 2018 to 25% by end-2024, with a target of 50% by 2030. Cheap drones that inflicted real damage on Gulf targets, set against expensive US kit, are pushing the Kingdom toward homegrown missile and drone capacity and what Bteish calls “a diversification of defense partners.”

What’s next: Watch the balance of payments. The near-term concern is the double-lock, with both sea gates closing together. Over a longer horizon, S&P is tracking whether higher fiscal deficits are sustained, the growth in the government interest burden as a share of revenue, and the pace of increase in banks’ external debt after slowing this year. Bteish flags sovereign bond issuance as the tell on how much capital the Kingdom needs to attract and whether investors still want the risk. On the current evidence, they do.