Japanese refiners have ramped up crude oil procurement from the Middle East following the forced shutdown of Saudi Arabia's key east-west pipeline, as fears over an imminent global supply shortage intensify.

According to informed traders, Eneos Holdings Inc. and Idemitsu Kosan Co. have recently purchased Omani crude with the earliest loading dates set for October. This marks an unusually early timeline, as Persian Gulf cargoes bought in September typically load in November. The accelerated buying underscores growing market anxiety over potential Middle East supply disruptions, with Asian refiners aggressively competing for promptly available cargoes, pushing spot premiums sharply higher. While the total volume remains unclear, two cargoes of roughly 2 million barrels each were reportedly sold at premiums of up to $38 per barrel above the Dubai benchmark, with sellers including trading houses and major oil companies.

Japan's Heavy Reliance on Middle Eastern Crude

Japan, a nation heavily dependent on imported energy and anchored by a manufacturing-driven economy, sourced approximately 90% of its crude from the Middle East prior to the outbreak of the US-Israel-Iran conflict in late February. Although Japan has previously attempted to diversify away from this reliance, such efforts have faced structural and geopolitical hurdles.

Following the oil crises of the 1970s and 1980s, Japan built up strategic crude reserves to hedge against supply disruptions and increased imports from other Asian producers. Middle Eastern crude's share of Japan's energy imports peaked at 91.2% in 1967 before declining to 67.9% by 1987. However, this diversification trend reversed as rising domestic consumption in Asian producers like Indonesia reduced available supplies. Meanwhile, Middle Eastern crude spot prices remained around $10 per barrel for extended periods, making it the most commercially viable option for Japanese trading houses and refiners.

Geopolitical shifts have also undermined Japan's diversification plans. Imports of Russian crude grew steadily after 2000, but following Russia's invasion of Ukraine, Japan aligned with US foreign policy, prompting retaliation from Moscow and nearly eliminating Russian supply. With limited alternatives, Japan reverted to its traditional reliance on the Middle East.

More critically, Japan's refining infrastructure was purpose-built around Middle Eastern crude characteristics. Mitsuru Yamada, general manager at Tokyo investment firm Sprint Capital Japan, noted that domestic refineries were designed to process high-sulfur heavy crude from the Middle East and lack the equipment to handle lighter crudes like those from the US. Transitioning to alternative sources would require massive capital investment in facility upgrades, which companies are reluctant to undertake amid declining crude imports driven by emissions reduction and energy transition policies.

Global Supply Under Mounting Pressure

Escalating Middle East tensions have intensified concerns over broader supply disruptions. The US-Iran military conflict, ongoing for over six months since late February, has nearly paralyzed the Strait of Hormuz, the world's most critical energy chokepoint, with no signs of imminent de-escalation.

Adding to the instability, the situation in Yemen has deteriorated. As fighting intensifies between Houthi rebels and Saudi-backed government forces, the Houthis are advancing toward coastal areas adjacent to the strategic Bab el-Mandeb Strait. Having already disrupted shipping and oil markets by controlling the port of Hodeidah and surrounding areas, capturing the port of Mocha would give them control of a second vital port, further tightening their grip on the waterway.

On September 11, Saudi Arabia's Energy Ministry announced that multiple attacks had struck the Riyadh and Medina sections of the east-west pipeline the previous day, prompting precautionary shutdown measures. This pipeline, built in the 1980s, stretches over 1,200 kilometers from the oil-producing regions along the Persian Gulf in the east to the Red Sea port of Yanbu, serving as a critical alternative route for Saudi crude exports that bypass the Strait of Hormuz. Following the disruption of Hormuz shipping amid ongoing conflict, Saudi Arabia had rapidly shifted exports to this pipeline, with daily throughput surging from approximately 3 million barrels to 7 million barrels.

Traders and sources warn that if the east-west pipeline remains offline for several days, global crude supply could contract by as much as 4%. Storage at Yanbu port can sustain only 5 to 7 days of exports, with limited reserves held in Egypt. Saudi Aramco has already begun delaying crude deliveries to some European customers.

The combination of blocked Hormuz traffic, disrupted Red Sea shipping, and the pipeline closure has placed unprecedented strain on the global supply system. Ben Cahill, senior fellow at the Atlantic Council's Global Energy Center, noted that the Red Sea shipping lane has been crucial, with energy security over the past six months relying on bypass routes including Saudi Arabia's east-west pipeline and another high-capacity backup pipeline in the UAE. A prolonged shutdown of the east-west pipeline would present enormous challenges, given its status as the most important conduit circumventing the Strait of Hormuz.

Cahill added that the various buffers that helped markets withstand shocks over the past six months have been largely exhausted. Strategic reserve releases played a key role, but such large-scale deployments cannot be repeated. If attacks persist and the Red Sea route faces prolonged disruption, oil prices will likely climb further.

Should sustained high oil prices exacerbate Japan's inflation risks, the Bank of Japan may be compelled to tighten monetary policy at a faster pace. A recent survey shows nearly 90% of economists expect the central bank to raise its benchmark rate by 25 basis points to 1.25% this Friday. A notable shift in market expectations is the consensus that the BOJ will accelerate its hiking cycle beyond the recent gradual pace, with all 52 economists surveyed last week predicting a rate increase this Friday and approximately 93% expecting another hike by January. The proportion anticipating quarterly hikes has risen to 46%, while those expecting semi-annual hikes has plummeted from 82% in July to just 6%.