Forbes India 15th Anniversary Special

Attack on Saudi oil facility is seen as short-term disruption

One of Saudi Arabia's most prominent oil facilities was crippled by a drone attack, but experts say that a severe shock to energy markets and the world economy is unlikely

By Clifford Krauss and Stanley Reed
Published: Sep 16, 2019

Attack on Saudi oil facility is seen as short-term disruptionA gas line ahead of Hurricane Dorian's passing in West Palm Beach, Fla., Aug. 30, 2019. The drone attack on one of Saudi Arabia’s most important oil facilities could cripple a portion of Saudi petroleum exports for days or even weeks and send energy prices higher. But experts say that a severe shock to energy markets and the world economy is unlikely
Image: Saul Martinez/The New York Times

HOUSTON — The drone attack on one of Saudi Arabia’s most important oil facilities could cripple a portion of Saudi petroleum exports for days or even weeks and send energy prices substantially higher. But experts say that a severe shock to energy markets and the world economy is unlikely.

The attack on the Abqaiq processing facility and another plant, deep in Saudi territory, displayed the vulnerability of the kingdom to tensions in the Persian Gulf region. The country produces about 10% of the world’s oil supplies. The disruption could slash Saudi Arabia’s daily oil exports of 7.4 million barrels by as much as three-quarters, taking roughly 5% of global supplies off the market, unless the facility is quickly repaired.

President Donald Trump suggested Sunday that he could release supplies from the Strategic Petroleum Reserve, an attempt to calm oil markets. In response, oil futures that had jumped more than $11 a barrel when the futures market opened Monday in Asia eased a bit to just more than $7 a barrel higher.

The attack raised the possibility of further disruptions in Saudi Arabia’s oil production if there were additional attacks on its fields and pipelines.

The planned initial public offering of the kingdom’s national oil company, Saudi Aramco, could also be hurt if international investors doubt Saudi Arabia’s ability to defend its vital energy infrastructure.

But as luck would have it, the attack came as global oil stockpiles were higher than usual, several producing countries have ample spare capacity and U.S. oil facilities have so far been spared from a damaging hurricane season. Meanwhile, a slowing global economy has moderated energy demand.

“We do not expect an immediate disruption on global oil trade, since many nations, including the U.S., have ample crude oil in storage,” said Manish Raj, chief financial officer of Velandera Energy Partners, a Louisiana oil exploration and production company. “The Saudis themselves have enough storage to meet their export obligation for the next 60 days. Therefore, we expect no supply-demand imbalance in the near term.”

The main uncertainty is how long will it take for the Saudis to repair the Abqaiq facility, which separates gas from oil from several important oil fields. While the fire was put out quickly, the Saudis may not know the answer for days since the facility is large and has complex equipment that still needs to be tested.

Should the damage be fixed quickly, Eurasia Group, a risk consulting firm, estimates that oil prices could rise a modest $2 to $3 a barrel, which would still leave the global benchmark Brent crude below $65 a barrel, relatively low by recent historical standards. The firm estimated that a more long-lasting disruption could mean an increase of $10 a barrel, though that would still leave prices several dollars below where they were a year ago.

Other analysts took a dimmer view, even as Saudi Aramco said Sunday that repairs were already underway. The initial reaction of oil traders was panicky.

“The problem is that the attack is so significant, “ said Bill Farren-Price a director at RS Energy Group, a market research firm. “It demonstrates that one of the best regional oil companies has difficulties defending itself from this new style of threat. That theme is going to endure. “

There are doubts the Saudis will be able to maintain their usual exports and satisfy domestic consumption.

“Export volumes will be severely impacted,” Clay Seigle, an analyst at Genscape, a market research firm, said in an email. “The market will be left with a thinner cushion against additional supply disruptions, and traders will bid prices higher as a result.”

How the other countries in the Saudi-led OPEC will respond is not yet clear. In a phone conversation, an official with the Organization of the Petroleum Exporting Countries said that the Saudis had so far not shared information about the extent of the damage and when output might be restored. He also said that OPEC had not yet begun discussions on potentially loosening supplies. “We have to see how the market reacts tomorrow,” the official said.

The average price for a gallon of regular gasoline in the United States was $2.57 on Sunday, 28 cents lower than it was a year ago. That decline has been a boon to consumers, giving them extra spending power that has helped retailers and restaurants. An increase in prices to last year’s levels is possible over the next few weeks unless the Saudi facility is quickly fixed, energy analysts said.

Only a decade ago, the attack would probably have sent oil prices soaring. But that was before U.S. oil production climbed with the shale drilling frenzy. The United States now produces roughly 12.1 million barrels a day, double what it produced in 2012 and 1.4 million barrels more than only a year ago.

The United States imports about 630,000 barrels of Saudi oil a day, down about half from 2017.

U.S. oil companies have recently been cutting back on production, but higher oil prices would encourage them to produce more. At the same time, several pipelines to the Gulf Coast are nearing completion and that could stimulate significant export growth over the next six to 10 months.

Other oil-producing countries are also ramping up production, including Norway and Brazil, while Iraq, Nigeria and Russia have been producing a total of 650,000 barrels of oil above the levels agreed to with their OPEC partners.

The United States and other developed countries have nearly 3 billion barrels in stockpiles, according to the International Energy Agency, enough to take care of about two months of demand. That is about 50 million barrels above a year ago, despite U.S. sanctions on Iran and Venezuela that have constricted their exports.

The stockpiles of the industrialized countries are at their highest level since September 2017, and are nearly 20 million barrels above the average of the last five years, according to the energy agency.

“For now, markets are well-supplied with ample commercial stocks, “ the agency said in a statement Saturday, adding that it was “monitoring” the Saudi situation.

Saudi Arabia has roughly 27 days of supply stockpiled, according to S&P Global Platts, a provider of energy information. That stockpile is stored not only in the kingdom but also Egypt, Japan and the Netherlands for added security.

The developed countries and China have sizable strategic reserves as well in cases of emergency, although stockpiles have been declining in the United States and Europe in recent weeks.

Until this weekend, OPEC has been more concerned about oversupply than shortages. As recently as Thursday, oil officials from OPEC, Russia and other producers met in Abu Dhabi and appeared to call for even tighter adherence to the production cuts they have maintained for almost three years. Those cuts were aimed at propping up prices and keeping the market from being swamped by oil.

The United States alone has as much as 713 million barrels in its strategic reserve, and administration officials are already talking about releasing some oil on the market to tamp down any gasoline price increase.

Trump said in a tweet Sunday evening that he had “authorized the release of oil from the Strategic Petroleum Reserve, if needed.”

Such releases have had a powerful psychological effect on oil markets since the reserve was established after the oil embargoes of the 1970s. It has been drawn only occasionally, including during the first Persian Gulf war in 1991, Hurricane Katrina in 2005 and during the Arab Spring in 2011, when Libyan exports were halted.

©2019 New York Times News Service