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The attack that damaged some of Saudi Arabia's biggest oil plants will continue to have wide-ranging effects across global oil and energy markets.
Published: October 1, 2019
The strike on the state oil producer Saudi Aramco's, Abqaiq oil-processing facility and the Khurais oilfield on Saturday, Sept. 14, won't only trigger higher oil prices but will also heighten geopolitical tensions that have already been ramping up in the Middle East. The Saturday strikes by aerial drones, claimed to have been conducted by the Houthi rebels in Yemen, resulted in Saudi Arabia cutting crude production by 5.7 million barrels per day (bpd).
This direct hit on more than half of Saudi Arabia's total production, and any protracted delays in restoring supplies, will have significant ramifications for oil markets. However, recent updates from Saudi Arabia indicate it's hoping to bring 2.2 million barrels online by the end of the day Monday. Nevertheless, the fact that one combined strike can knock out not just 5% of global supply, but more than double the amount of global spare-production capacity, highlights the concentration risk and oil market vulnerabilities.
Why the Oil Market is Wrong About Abqaiq
A week after attacks on Saudi oil facilities shut down nearly 6% of the global oil supply, Brent futures prices are up less than $5/b. The market reaction has been wrong, though, giving Saudi estimates that output will quickly return far too much credibility and significantly undervaluing an increase in geopolitical risk, says Amy Myers Jaffe, a longtime market and policy expert.
Oil markets are reeling from the biggest attack on oil infrastructure since the Gulf War after drones hit Saudi Arabia's key Abqaiq processing facility and Khurais oil field. The attacks have taken 5.7 million b/d of oil production offline, about half of the kingdom's capacity and some 5% of global supplies.
Key Takeaways
An attack on Saudi Aramco's oil processing facilities at Abqaiq and Khurais may cut production by as much as 5.7 million barrels of oil per day, equivalent to around half of the country’s production and around 5% of global output. The U.S. government may respond with releasing oil from the Strategic Petroleum Reserve, according to the White House, which as at Sept. 12 held 644.8 million barrels of oil – ie equivalent to 113 days of lost output from Saudi Arabia.
Key Takeaways
The attacks on Saudi Aramco's oil facilities have exposed Asia's vulnerabilities in absorbing supply disruptions with purpose-built emergency stocks, which either don't exist or fall short of global standards.
While organizations like the International Energy Agency have coordinated strategic petroleum reserves in member countries, most Asian countries are not IEA members and are unable to fund expensive long-term storage programs.
Key Takeaways
Saudi oil output is unlikely to be fully restored in the next couple of weeks despite assurances by Saudi officials and a drawdown of oil stocks to keep exports flowing, according to analysts.
Prince Abdulaziz bin Salman, the new energy minister appointed last week, said in a briefing Tuesday that more than half of the 5.7 million b/d of output lost after attacks on oil facilities on Saturday was back online and predicted production would return to 11 million b/d by the end of this month and 12 million b/d by the end of November. He also said that exports in September would be unaffected because oil stocks were being drawn down.
Key Takeaways
The drone attack on the Saudi Arabian Oil Co., or Saudi Aramco, facility in Abqaiq could be a costly one for Aramco in more ways than one, analysts at the Atlantic Council told journalists Sept. 16.
The attack, which Houthi insurgents from Yemen have taken responsibility for, knocked approximately 5.7 million barrels per day of crude oil off the market overnight. According to Phillip Cornell, a non-resident senior fellow at the Atlantic Council's Global Energy Center, such an outage is an indication that the massive Abqaiq refinery had been taken offline completely.
Key Takeaways