Saudi officials are modeling a worst-case oil price scenario

Inside Riyadh’s oil worst-case scenario: Riyadh is reportedly modeling a worst-case oil price scenario, as strikes on infrastructure and the closure of Hormuz threaten to push crude toward USD 180 a barrel by late April should disruptions persist, unnamed Saudi officials told the Wall Street Journal.

“This is really uncharted territory for the oil market, as there has never been such a large, prolonged, and unpredictable supply outage,” Gulf analyst at GlobalPartners Justin Alexander tells EnterpriseAM. USD 180 / bbl is “not implausible” as it would still be lower in real USD terms than when oil prices hit over USD 145 / bbl during the 2008 financial crisis, but that surge was demand-side driven, Alexander said.

It’s all about how long the Hormuz closure is going to last. “I don’t think USD 150 is out of the question in another month […] You start talking about June, I’ll give you USD 180,” CIBC Private Wealth Senior Energy Trader Rebecca Babin said.

Higher prices can be good for us — but only for a little while. The short-term impact of high prices on our budget would be favorable, Alexander added, as the Kingdom should be able to export well over half the pre-war levels. “If the oil price averages over USD 140 / bbl, then it's a net benefit.”

It’s a different story after that. The WSJ reports officials are concerned about a similar scenario: the volatility could tip the global economy into recession or trigger a lasting demand hit as oil consumers cut back. For the medium term, Alexander anticipates higher prices for a longer period, driven by the risk premium and reduced global reserves. Still, “a global recession could also hit demand, so it’s a complex picture.”

IN CONTEXT- Saudi Arabia has cut output by some 2 mn bbl / d since the closure of Hormuz last month, with Saudi Aramco’s CEO Amin Nasser raising alarm bells over “the biggest crisis the region’s oil and gas industry has faced.” The ongoing conflict has already withheld mns of barrels from the global supply, with prices doubling since the war began last month.

Where do we stand?

Riyadh’s escape route under fire: The Kingdom’s facilities at Yanbu — the Red Sea outlet designed to bypass the Hormuz chokepoint — were targeted by an Iranian drone on Thursday. The port recorded some 4.2 mn bbl / d exiting its waters by last Wednesday as tankers lined up to offtake the redirected crude. However, another drone hit Samref refinery, raising concerns regarding the long-term security of the Gulf’s escape valve.

Prices reflect the damage: The string of attacks on energy infrastructure sent Brent futures as high as USD 119 a barrel, before it eased back slightly on Thursday. Gulf futures tied to Oman crude have already shot past USD 166 a barrel. Some customers are balking at the volatility, but Aramco is holding steady, insisting the price reflects a genuine physical shortage.

Why this matters

Pricing tightrope: Aramco is trying to price crude accurately while preventing global consumers from putting their pencils down and slashing oil use for good. Operators across the Kingdom and the wider Gulf are concerned about long-term market instability.

The road to USD 200 per barrel? “USD 200 a barrel is not outside the realm of possibility in 2026,” analysts at energy consulting firm Wood Mackenzie said. We’re inching dangerously close to the contracts all-time high, which hit USD 146.08 a barrel in July 2008.

What breaks first if oil reaches USD 200 per barrel? “A probable USD 8- USD 12 per gallon gas price kills spending and spurs electric cars. Gulf aluminum plants close without shipping from Hormuz. World trade growth slows as costs soar,” Wolfgang Lehmacher, former head of supply chain and transport industries at the World Economic Forum, tells EnterpriseAM.

Europe, Japan, and Korea could take the biggest hit, with Aramco weighing how the surging cost of its crude imports will drive up the cost of energy, inflation, and interest rates, ultimately slowing economies and demand.

The bigger picture: Surging oil means the end of cheap energy and factory inputs, Lehmacher EnterpriseAM. “A probable USD 8-12 / gallon gas price kills spending and spurs electric cars. Gulf aluminum plants will close without shipping from Hormuz. World trade growth will slow as costs soar,” he added.

Early signs of strain: Aramco has already cut its crude supply to Asian buyers for April for a second month running, Reuters reports, citing two insider sources. For now, the producer is only offloading Arab Light exports from Yanbu to term customers next month.

What’s next?

A 10-day countdown: All eyes are on 2 April, when Aramco is due to release its official selling prices. Until then, modelers are racing to identify the breaking point — the price at which gasoline demand starts to collapse and industrial activity becomes uneconomic.

Supply crunch ahead? Saudi light crude is being offloaded to Asian purchasers via Yanbu port for around USD 125 a barrel. We’re expecting to see physical shortage weigh heavier next week, as extra oil in storage –– a portion of which was shipped out of the Gulf prior to the war –– is used up.