Attacks in Saudi Arabia rock oil market

The loss of 5.7 million b/d of Saudi crude oil production to airborne incursion on Sept. 14 shoved the oil market into panicky adjustment and raised worry about retaliation in an always-tense region.

The loss of 5.7 million b/d of Saudi crude oil production to airborne incursion on Sept. 14 shoved the oil market into panicky adjustment and raised worry about retaliation in an always-tense region.

In a statement, Saudi Aramco attributed the disruption to “terrorist attacks with projectiles.” Early reports said the weapons were drones.

The price of Brent crude oil jumped to $77.88/bbl on news of the militancy before easing to about $66/bbl. On Sept. 13, Brent had traded slightly above $60/bbl.

Houthi rebels in Yemen claimed responsibility for the attacks on the 7-million-b/d crude oil processing facility at Abqaiq and 1.5-million b/d Khurais field.

Saudi Arabia leads a coalition fighting an air war against the Houthis, who receive support from Iran. Houthis have attacked targets in the southern part of the kingdom.

Officials from Saudi Arabia and the US said they doubted the Abqaiq and Khurais attacks originated in Yemen. Saudi officials said the weapons were made in Iran.

If confirmed, Iranian complicity would extend the geopolitical risk suddenly added to crude oil trading by a reminder about the vulnerability of Saudi production infrastructure.

It also would raise the risk of a regional escalation of military action. US President Donald Trump tweeted that the US was “locked and loaded” but seemed to defer to Saudi Arabia about response.

Market adjustment

More immediate are questions about duration of the supply interruption and the speed of market adjustment.

Saudi officials said they expected to be able to restore 1.9 million b/d of production quickly but offered no prediction about when full operations might resume.

Supplemental supply can come from storage and spare production capacity outside Saudi Arabia.

The kingdom has about 130 million bbl of oil in storage.

The International Energy Agency said in its September Oil Market Report that commercial inventories in member countries of the Organization for Economic Cooperation and Development reached their highest level since September 2017 in July at 2.931 billion bbl.

OECD members party to IEA’s emergency oil-sharing agreement also hold oil in strategic or obligatory storage. Trump said oil from the US Strategic Petroleum Reserve would be available if needed.

Besides stock withdrawal, supplemental supply also can come from production capacity now idle, especially among other members of the Organization of Petroleum Exporting Countries. Eleven OPEC members participate in the agreement to limit production in effect since January 2017.

According to IEA, OPEC members with significant spare capacity are the UAE, 330,000 b/d; Kuwait, 290,000 b/d; and Angola, 150,000 b/d.

August production by Russia, the most important of 10 non-OPEC countries collaborating with OPEC on supply restraint, was, at 11.6 million b/d, nearly 200,000 b/d below a recent high point recorded in October 2018.

US production of crude and condensate flattened in June and July at about 12 million b/d but was expected to begin rising again in August. The upturn would receive a boost from crude-price elevation and could occur quickly from more than 8,000 drilled but uncompleted wells the Energy Information Administration reports in key shale plays, subject to equipment availability and infrastructure constraints.

Addressing grade

Market adjustment will need to address grade as well as volume.

The Abqaiq processing center stabilizes and treats light, sour crude from Ghahwar and Khurais fields and extra light, sour crude from Shaybah field.

Jason Gabelman and Ben Varga of Cowen Equity Research noted that the disruption lowers supply in an already tight sour-crude market. They said most of the effect would be in Asia, the destination of most Saudi crude.

Wood Mackenzie Research Director Vima Jayabalan said Asian demand for Saudi crude has been about 5 million b/d—72% of the kingdom’s crude exports.

Asian consumption of Arab Extra Light and Arab Light oil from the attacked facilities varies seasonally at 2.5-2.7 million b/d.

China, South Korea, Japan, and India are the largest of Saudi Arabia’s customers.

China and Japan import most—900,000-1.1 million b/d each. China has strategic reserves, and South Korea and Japan hold IEA reserves.

India cold be “the most exposed” because it holds less oil in reserve, Jayabalan said.

Contact Bob Tippee at rtippee@endeavorb2b.com.

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