The closure of the East-West pipeline pushes crude oil prices towards $110

Whilst the United States and Iran remain deadlocked over control of the Strait of Hormuz, the blockage of the East-West oil pipeline – which crosses the Arabian Peninsula, from the Persian Gulf to the Red Sea, and is of crucial importance to Saudi Arabia – risks triggering a new energy crisis. A drone attack has therefore forced the closure of the pipeline that Riyadh was using to bypass the Strait of Hormuz and, according to some forecasts, this could result in a loss of up to 4 per cent of global supply.

The prospect of a further decline in Saudi oil supplies and fears that the country might even run out of its export stocks have sent the price of oil (Brent) soaring above $108–109 per barrel, with a rise of over 3 per cent in just a few hours, whilst Federpetroli has sounded the alarm: the price could reach as high as $120. Gas prices have also come under pressure as a result, with the IGI (Italian Gas Index) rising from 80.75 euros per MWh to 82.02 euros per MWh. According to an analysis by Goldman Sachs, “rising energy prices are likely to weigh on growth in the coming months, mainly through a reduction in households’ real income”. The US investment bank estimates that inflation in Europe could reach 3.6 per cent in the final quarter of the year and that GDP will slow in the latter part of 2026 and the early months of 2027, but it is not revising its forecasts for improved growth next year. So far, Goldman summarises, the European economy has proved more resilient than expected in the face of the effects of the war in the Middle East, and this, therefore, bodes well. “At the country level, we expect a modest slowdown in Spain and Italy – the latter characterised by high gas consumption – following a brilliant first half of the year and a good start to the third quarter. However, we do not rule out the possibility that growth figures in the peripheral eurozone may remain solid. We forecast a temporary weakening of growth in Germany during the winter months and remain cautious on France, which is coming off the back of a weak first half of the year.”

In short, excessive alarm would be unjustified. The blow has nevertheless been felt on the stock markets of the Old Continent, all of which have suffered sharp falls (the FTSE MIB lost 1.7 per cent), but it should be borne in mind that there was also a sharp fall in technology shares yesterday. The warning issued by the top executives of the major US tech giants regarding the need to slow down the development of artificial intelligence models has reignited investors’ doubts about the sector’s future revenue and profit prospects. Consequently, the energy and AI sectors were at the centre of a jolt to financial markets already on edge due to sharp rises in government bond yields (particularly US Treasuries and UK Gilts). A sort of perfect storm, in short.

In the background lies the serious geopolitical escalation in the Middle East, which has simultaneously affected the world’s two most critical maritime and land corridors for energy transport. The Saudi Ministry of Energy has confirmed that the East-West pipeline was struck on 10 September following drone attacks originating from Iraq and that the infrastructure has been shut down ‘as a precautionary measure’. However, neither the government nor Saudi Aramco has indicated the extent of the damage or the repairs required. In practice, there is no known date for the resumption of oil transit, and, as we know, the markets do not like uncertainty. Especially as there is no sign of this new crisis reaching its peak. Without new supplies arriving from within Saudi Arabia due to the damage caused by the drones, the crude oil that has been stockpiled in coastal depots to load onto ships bound for Europe and Asia may only last for a few days.

A study by Algebris notes that an “unusual” meeting between the Gulf states and Iran is scheduled for this week to discuss trade flows through the Strait of Hormuz. “These developments,” the analysis states, “appear to strengthen Iran’s position in the region, whilst the influence of the United States seems to be waning.” For the time being, however, it concludes, the markets are not seeing any significant impact on related assets, whilst concerns over geopolitical tensions are increasingly focusing on the sovereign debt front.