Tearing apart the last oil corridor

The Strait of Hormuz has been effectively closed since February. You already know that part. Saudi Arabia spent four months rerouting 75 percent of its crude export operation westward through the Petroline — a 1,200-kilometer pipeline from the eastern oil fields to the Red Sea port of Yanbu. It worked. The bypass valve held.

On Sunday, the Houthis closed the pipe at the other end.

Yemen’s Houthi forces declared a full maritime blockade on Saudi Arabia, targeting the Bab el-Mandeb Strait — the narrow chokepoint that connects the Red Sea to the Gulf of Aden. Seventy to seventy-five percent of Yanbu’s crude must pass through it. CNN is running “oil faces no way out.” Bloomberg is tallying tanker attacks. CNBC is debating ceasefire odds. None of them are looking at the loading docks.

Two tankers — one VLCC and one Aframax — carrying 2.7 million barrels of Saudi crude U-turned in the Red Sea yesterday. Saudi loadings through Bab el-Mandeb fell 36% in two weeks — from 9.5 million barrels to 6.1 million. At least nine ships have been attacked in the Strait of Hormuz since July 6. Insurers are telling shipowners to pause voyages entirely.

The market spent June pricing in a ceasefire with Iran. Trump declared it dead on July 8. And now the bypass that was supposed to make Hormuz irrelevant is itself under siege. I’ve traded through a single-chokepoint disruption before. I’ve never seen two close simultaneously on the same exporter.

Narrative off. Here’s the plumbing.

The Saudi Petroline pipeline runs at 7 million barrels per day — an all-time record. But there’s a bottleneck everyone keeps ignoring. Yanbu’s two terminals have a combined loading capacity of roughly 4.5 million barrels per day. Pipeline pushes 7 million in. Port can only push 4.5 million out. That leaves 2.5 million bpd of eastern Saudi production with no westward route at all.

And even the 4.5 million that makes it to Yanbu has to run the Bab el-Mandeb gauntlet. War risk insurance now sits at 0.5–1.0% of hull value per transit. A $100 million VLCC costs $500,000 to $1 million just to get through. Before the war, that premium was roughly $50,000 to $80,000.

Meanwhile, the U.S. Strategic Petroleum Reserve stands at 311.4 million barrels — 43.6% of capacity, the lowest level since March 1983. Fourteen consecutive weekly drawdowns at roughly 5–6 million barrels per week. That reserve is doing the job no shipping lane can anymore. The question is how many more weeks it can keep doing it.

The futures curve already knows something the headline writers don’t. Brent July 2026 trades at a $29.34 premium to July 2027. That’s not normal backwardation. That’s the physical market offering to pay almost thirty dollars more per barrel for oil right now versus oil twelve months from now. The convenience yield on having crude in hand has gone parabolic.

Here’s the part that should make you uncomfortable. The speculators are leaning the wrong way.

CFTC data from July 14 shows non-commercial net longs in crude oil dropped to 62,700 contracts, down from 110,500 just weeks earlier. That is a 43% reduction in bullish positioning while two straits are shutting and tankers are literally U-turning in open water. The machines read June’s ceasefire optimism and Doha talks, ran the regression, and concluded: short-term bearish. They did not, apparently, check what the Houthis were loading onto their coastal launchers.

That’s the whole joke. Spare capacity is meaningless if you can’t ship it. Saudi Arabia can pump 12 million barrels a day if it wants. But if Hormuz is shut and Bab el-Mandeb is under blockade, where does the oil go? Into the pipeline, through Yanbu, and then … into a queue of VLCCs that can’t get insurance to transit the strait. I’ve watched markets lean on the “OPEC spare” number like it’s a floor. It isn’t a floor. It’s a number on a spreadsheet in Vienna that assumes the loading docks work.

And the SPR? At 5–6 million barrels per week, the current drawdown rate gives roughly 50–55 weeks of remaining buffer on paper. But the operational floor is far higher than zero. Salt dome caverns require minimum pressurization. Maintenance cycles can’t be deferred forever. The actual usable cushion is thinner than anyone in Washington wants to admit.

I watched a version of this in late February when Hormuz first closed and everyone assumed Saudi rerouting would solve it in a week. It took less than two weeks. The price went from $70 to $102 in that window. This time, the reroute itself is the thing breaking.

The sequence is mechanical. If you’ve watched any chokepoint disruption — Suez 2021, Hormuz in February — the order of operations is always the same. Only the scale changes. This time, the scale is unprecedented.

Bank of America says $100 Brent if the Hormuz disruption persists. Citi goes further: $150 if the Strait of Hormuz disruption is prolonged. We are, as of Sunday, in the early innings of a dual-closure scenario. The VLCCs are already turning around.

The first thing that breaks is the speculative positioning. At 62,700 net longs — a five-month low — the managed-money crowd is not prepared for a physical supply crisis. When physical premiums force the front of the curve higher, they either cover or get carried out. That repricing alone could add $5–8 to the barrel.

Where does the capital not go? Into anything that needs Gulf crude delivered on schedule. Refiners in China, Japan, South Korea, and India — the biggest importers of Saudi barrels — are the pressure point. They’re about to compete for a shrinking pool of non-Gulf cargoes, and the SPR won’t easily backstop them — while released barrels can technically be exported, the reserve is designed for U.S. domestic emergencies, not Asian supply crises.

The futures curve is at $29 backwardation. The specs are positioned light. The emergency reserve is at a 43-year low. And the last functioning oil corridor out of the Persian Gulf is now under blockade by a militia with a demonstrated willingness to hit tankers. The physical market already knows what’s coming. It just needs the paper market to catch up. In my experience, that reconciliation is never gentle and never as far away as it looks.