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As Inventories Cushion Oil Price Impact, Abqaiq Strike Spotlights Risks to Spare Capacity

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.

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Infographic: Attacks lay bare Saudi Arabia's oil vulnerability

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

  • – Claimed by Iran-backed Houthi rebels, the attack caused spot Brent crude to spike 19% to $71.95/b at market open Monday before the oil benchmark slipped back to around $66/b. The threat of an extended supply outage from Saudi Arabia, the world's top crude exporter, highlights the lack of spare production capacity in the market, with the impact of this being felt across upstream and downstream markets.

View the Infographic

Saudi Oil Attack’s Direct Impact on U.S. May Be Limited

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

  • – Panjiva data shows that while Saudi Arabia accounted for 150 million barrels of supply to the U.S. in the 12 months to Jul. 31, that was only equivalent to 6.9% of all imports. 

  • – The availability of the precise grades of oil may have a negative impact on specific refiners though who may have limited alternatives and / or need to retool their refineries to handle different grades. 

Saudi disruptions expose Asia's deficient emergency oil reserves

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

  • – While the IEA does not immediately need to release emergency stocks, it needs to be prepared for an escalation of military conflicts between Saudi Arabia and Iran, Nobuo Tanaka, former IEA executive director said Thursday. 

  • – China saw the strongest growth in Saudi crude imports this year, accounting for 16% of the total, but Japan, South Korea and India have higher Saudi exposure of 36%, 28% and 19%, respectively.  

Saudi Oil Output Unlikely to be Fully Restored as Quickly as Officials Say

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

  • – Analysts are skeptical and say the numbers do not assure the oil markets about current production levels and that the outage will leave the kingdom with little spare capacity, keeping markets on edge. 

  • – Analysts also question the level of stocks still available to meet supply to Aramco's customers. Neither Prince Abdulaziz nor Aramco CEO Amin Nasser shed light on the level of oil stocks still available. 

Industry Observers Say Saudi Damage Could Extend Beyond Production, IPO

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

  • – Cornell said that satellite footage showed five of the Abqaiq plant's 18 stabilization towers, which are used to separate other hydrocarbons from crude oil, were destroyed in the drone attack.  

  • – The attack on the Abqaiq facility comes at a poor time for Aramco and the Saudi government as the anticipated Aramco IPO is picking up steam.