As Saudi Arabia seeks to reassure customers that their crude supplies would see limited impact from the weekend's drone attacks on its critical crude processing plant, analysts said its significant volumes of oil in storage should help keep exports flowing and mitigate any disruption in the short-term.
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Oil prices are still likely to rise Monday, they said, as traders reassess the geopolitical fallout and the risks of an escalation in Middle East tensions as the US, a close ally of Saudi Arabia, continues to ratchet up sanctions on Iran.
The drone strikes early Saturday on the Abqaiq processing facility -- the largest in the world -- and the Khurais field come at a time when the global oil market appears to be tightening, with demand outpacing supply in recent weeks on the backs of OPEC production cuts, Venezuela's collapsing crude output and the US sanctions that have slashed Iran's oil exports.
An extended outage from Saudi Arabia, the world's top crude exporter, would highlight the lack of spare production capacity elsewhere in the market to respond to supply crises.
"Current oil markets have been operating like the market was oversupplied and demand is slowing," said Joe McMonigle, an analyst with Hedgeye Capital. The "attack on key oil infrastructure so important to global supply will test this oversupply theory."
S&P Global Platts Analytics, which estimates that Brent prices could hit $70/b and possibly even test $80/b over the coming days, pegged global spare production capacity at 2.3 million b/d -- of which more than 1.6 million b/d is held by Saudi Arabia.
On Friday, NYMEX front-month crude settled 24 cents lower at $54.85/b, while ICE front-month Brent settled 16 cents lower at $60.22/b.
"This should make markets especially nervous given uncertainties in Yemen, Iraq, Libya, and elsewhere," Platts Analytics said in a note Saturday. "Moreover, given the Middle East's combustible combination of regional and sectarian rivalries, economic stress, high youth populations, and a persistent jihadist presence, the next disruptive conflict could be a matter of time."
Saudi officials said Saturday that fires caused by the "terrorist attacks" were under control but had caused 5.7 million b/d of crude production -- half of the kingdom's capacity -- to be shut in, along with 2 Bcf/d of associated gas that produce about 700,000 b/d of NGLs.
Nobody was hurt, and work was underway to restore output, with a progress update to be provided Monday, Saudi Aramco CEO Amin Nasser said in a statement.
The attacks could have OPEC reassessing its plans to tighten compliance with crude production quotas, though delegates told Platts on Sunday that they would wait to see the market impact before reacting.
The producer bloc had just announced Thursday that it would keep its 1.2 million b/d supply cut agreement with Russia and nine other allies unchanged through its scheduled expiry of March 2020, though with improved adherence by Iraq and Nigeria to their quotas. The UAE had also declared its intent to lower its production to exceed its committed cut.
OPEC officials said they had yet to hold official discussions about the fallout from the Saudi incidents.
OPEC Secretary General Mohammed Barkindo told Platts that he was "still gathering more details" on the attacks.
A Gulf delegate who spoke on condition of anonymity said: "Tomorrow will determine how the market will react, up or down. It is too early to ask for an emergency meeting before we have the market reaction."
Vandana Hari, who heads oil market analysis firm Vanda Insights, said any change to the OPEC/non-OPEC supply accord "will be a secondary option to the release of strategic stocks."
The International Energy Agency requires its members to hold stocks equivalent to 90 days' worth of net imports.
It said on Twitter on Saturday that markets were "well-supplied with ample commercial stocks."
The US Department of Energy "stands ready to deploy resources from the [Strategic Petroleum Reserve] necessary to offset any disruptions to oil markets as a result of this act of aggression," Shaylyn Hynes, an agency spokeswoman, said Saturday.
Saudi Arabia's own stockpiles of crude totaled 187.9 million barrels in June, according to the Joint Organizations Data Initiative. This implies that the kingdom has 26.8 days of cover, assuming zero crude production.
Saudi Arabia holds crude in storage in domestic tanks as well at sites in Eqypt, Japan and the Netherlands.
Traders with Asian refineries, the main customers for most Middle East crudes, said Saudi Aramco had reached out to them to reassure them of supply security.
October volumes from Middle East NOCs were allocated last week, with Asian market sources indicating they received no cuts to allocations.
Traders said they were not sure if there would be any review of those allocations.
"Loadings still as per normal," one trader told Platts, with another adding: "Our supply so far [is] all OK."
--Edited by Claudia Carpenter, firstname.lastname@example.org