Saudi Arabia’s return to its full oil supply capacity after Saturday’s attacks on Aramco oil plants could take “weeks not days”, a source close to the matter told Reuters on Sunday.
The attacks in Abqaiq and Khurais knocked down some 5.7 million barrels per day (bpd) of the kingdom’s oil production and Saudi officials have not given a timeline for restoring full supply.
Yemen’s Iran-aligned Houthi group said it attacked two plants at the heart of Saudi Arabia’s oil industry on Saturday, knocking out more than half the Kingdom’s output, in a move expected to send oil prices soaring and increase tensions in the Middle East.
Fires burn in the distance after a drone strike by Yemen’s Iran-aligned Houthi group on Saudi company Aramco’s oil processing facilities, in Buqayq, Saudi Arabia September 14, 2019 in this still image taken from a social media video obtained by REUTERS.
The attacks will cut the kingdom’s output by 5.7 million barrels per day (bpd), according to a statement from state-run oil company Saudi Aramco, or more than 5% of global oil supply.
The pre-dawn strikes follow earlier cross-border attacks on Saudi oil installations and on oil tankers in Gulf waters, but these were the most brazen yet, temporarily crippling much of the nation’s production capacity. Saudi Arabia is the world’s biggest exporter, shipping more than 7 million barrels of oil to global destinations every day, and for years has served as the supplier of last resort to markets.
While the Houthis claimed responsibility for the attack, U.S. Secretary of State Mike Pompeo put the blame squarely on Iran, writing on Twitter that there was “no evidence the attacks came from Yemen.”
“Amid all the calls for de-escalation, Iran has now launched an unprecedented attack on the world’s energy supply,” Pompeo said.
Saudi de facto ruler Crown Prince Mohammed bin Salman told U.S. President Donald Trump by telephone that Riyadh had the will and capability “to confront and deal with this terrorist aggression,” according to Saudi state news agency SPA.
The United States condemned the attacks and Trump told the crown prince that Washington was ready to work with the kingdom to guarantee its security, according to the White House. The U.S. Department of Energy also said it was ready to release oil from its strategic petroleum reserve if necessary. Energy Secretary Rick Perry also said his department would work with the International Energy Agency, which coordinates energy policies of industrialized nations, if global action is needed.
Saudi Arabia, leading a Sunni Muslim coalition that intervened in Yemen in 2015 against the Houthis, has blamed regional rival Shi’ite Iran for previous attacks, which Tehran denies. Riyadh accuses Iran of arming the Houthis, a charge denied by the group and Tehran.
HEART OF OIL MARKET
“Abqaiq is perhaps the most critical facility in the world for oil supply,” said Jason Bordoff, who runs the Center On Global Energy Policy at Columbia University and served on the U.S. National Security Council during Barack Obama’s presidency. “The risk of tit-for-tat regional escalation that pushes oil prices even higher has just gone up significantly.”
Abqaiq is 60 km (37 miles) southwest of Aramco’s Dhahran headquarters. The oil processing plant handles crude from the world’s largest conventional oilfield, the supergiant Ghawar, and for export to terminals Ras Tanura – the world’s biggest offshore oil loading facility – and Juaymah. It also pumps westwards across the kingdom to Red Sea export terminals.
Two of the sources said Ghawar was flaring gas after the strikes disrupted gas processing facilities. Khurais, 190 km (118 miles) further southwest, contains the country’s second largest oilfield.
For the longest time they have never had any real fears that their oil facilities would be struck from the air
“These attacks against critical infrastructure endanger civilians, are unacceptable, and sooner or later will result in innocent lives being lost,” the embassy quoted Ambassador John Abizaid as saying in a Twitter post.
Andrew Murrison, a British foreign affairs minister, called on the Houthis to stop threatening civilian areas and Saudi commercial infrastructure.
It was the latest in a series of Houthi missile and drone strikes on Saudi cities that had largely been intercepted, but have recently hit targets, including Shaybah oilfield last month and oil pumping stations in May. Both those attacks caused fires but did not disrupt production.
“This is a relatively new situation for the Saudis. For the longest time they have never had any real fears that their oil facilities would be struck from the air,” Kamran Bokhari, founding director of the Washington-based Center for Global Policy, told Reuters.
Aramco’s CEO said in a statement that the situation had been brought under control. A Reuters witness said the fire in Abqaiq appeared to have been extinguished by early evening.
ESCALATING TENSIONS
Regional tensions have escalated after Washington quit an international nuclear deal and extended sanctions on Iran.
The violence is complicating U.N.-led peace efforts to end the Yemen war which has killed tens of thousands and pushed millions to the brink of famine. The conflict is widely seen as a proxy war between Saudi Arabia and Iran.
The coalition intervened in Yemen after the internationally recognized government was ousted from power in Sanaa by the Houthis, who say they are fighting a corrupt system.
The coalition launched air strikes on Yemen’s northern Saada province, a Houthi stronghold, on Saturday, a Reuters witness said. Houthi-run al Masirah TV said a military camp was struck.
The Houthis’ military spokesman, without providing evidence, said drones hit refineries at both Saudi sites, which are more than 1,000 km (621 miles) from the Yemeni capital Sanaa, and pledged a widening of assaults against Saudi Arabia.
ANALYSTS’ VIEWS
The oil market will rally by $5-10 per barrel when it opens on Monday and may spike to as high as $100 per barrel if Saudi Arabia fails to quickly resume oil supply lost after attacks over the weekend, traders and analysts said.
Below are quotes from market participants, traders and analysts.
BOB MCNALLY OF RAPIDAN ENERGY
Crude prices LCOc1 would spike by at least $15-20 per barrel in a seven-day disruption scenario and go well into triple digits in a 30-day scenario.
“This does not include what are likely to be large (if difficult to model or predict) premia to reflect zeroing out of global spare production capacity amidst ongoing disruption risks, hoarding, and panic sentiment.”
GREG NEWMAN, CO-CEO OF ONYX COMMODITIES
Expects Brent futures to open $2 per barrel up and close $7 to $10 per barrel higher on Monday.
The market could see a return to $100 per barrel if the issue cannot be resolved in the short term.
In the swaps market, Dubai timespreads could see a $1.50-$2 barrel backwardation as end-users scramble to cover shorts for short-term loading.
Refined product prices will be strong, with particular emphasis on high-sulfur fuel oil given current tightness and that it is the refinery product most closely linked to Saudi heavy crude.
AYHAM KAMEL, EURASIA GROUP
“A small $2-$3 per barrel premium would emerge if the damage appears to be an issue that can be resolved quickly, and $10 if the damage to Aramco’s facilities is significant.”
“The scale of (the) attack will encourage markets to re-examine the need for considering an oil geopolitical risk premium … The attacks could complicate Aramco’s IPO plans given rising security risks and potential impact on its valuation.”
“The U.S. would only release crude from its strategic reserves if damage to infrastructure appears critical or oil prices spike significantly.”
SAMUEL CISZUK, FOUNDING PARTNER AT ELS ANALYSIS
“The outage of 5 million bpd (barrels per day), roughly half of the current Saudi production level and about 5% of global supply, is very large by historic standards. It would in relatively few weeks start to put a stress on the market.”
“This incident is a very uncomfortable wake-up call to radically higher risk premiums on Gulf production.”
CHRISTYAN MALEK, JP MORGAN
“I’d expect a $3-$5 move in oil prices in the short term. The market has been sleep-walking in risk premium in the region, disproportionately focusing on risk to demand growth and shale oil supply.”
“This attack introduces a new, irreversible risk premium into the market.”
Expects oil to rise to $80-90 a barrel over the next three-six months as the market turns its focus to geopolitics.
GARY ROSS, BLACK GOLD INVESTORS
“The heart of the Saudi oil industry has been successfully attacked so look for prices to rise substantially to $65-$70 per barrel.”
“These attacks are difficult to stop and could occur periodically. The market has to price this risk in.”
JOHN DRISCOLL, JTD ENERGY
“This is significant as it takes out twice the volume of the spare capacity in the market, which is at 2.0-2.5 million bpd.”
“There’s going to be an initial panic reaction. Anyone who’s hedged on the short side will want to get out quickly. This may cause a significant spike upwards.”
TILAK DOSHI, MUSE & STANCIL
“In the oil universe, this attack is perhaps equivalent to the 9/11 attacks … Abqaiq is easily the world’s single most important oil production and processing infrastructure site.”
“This puts Iran’s wars-by-proxy in the region squarely in the center of the security concerns of the Middle East.”
“For Asian governments, perhaps this overtakes the perennial concern about the safety of tanker traffic in the Strait of Hormuz with even more serious concerns about the impact of a direct breakout of hostilities between the Saudi alliance and Iran.”
“Governments throughout the Asian region will perhaps now be more supportive of the U.S. administration’s tough sanctions regime on Iran.”
