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Crude futures rally following attacks on Saudi Arabian crude processing plant

New York — Crude futures rallied Sunday evening after attacks on a critical Saudi Arabian crude processing plant put geopolitical risk premium back into the market, although gains were capped by news the US would release crude from its Strategic Petroleum Reserve.

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NYMEX front-month crude rallied $8.49 to $63.34/b, while ICE front-month Brent rallied $11.73 to $71.95/b.

However, prices pulled off their highs as the market digested an announcement minutes before the open by US President Donald Trump authorizing via Twitter the release of crude from the US Strategic Petroleum Reserve in a "to-be-determined amount."

By 2215 GMT, NYMEX front-month crude was trading $5.65 higher at $60.50/b, while ICE Brent was trading $7.38 higher at $67.60/b.

Trump's announcement followed a statement Saturday that the US Department of Energy was ready to release crude from the reserve.

Refined products also jumped Sunday evening, with NYMEX front-month RBOB peaking at $1.7533/gal, up 20 cents, and NYMEX ULSD rising 17.47 cents to $2.0525/gal. Both RBOB and ULSD pulled off their highs following the initial rally.

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LOST PRODUCTION

The strikes early Saturday on the Abqaiq processing facility and the Khurais field caused 5.7 million b/d of crude production -- half the country's capacity -- to be shut in, along with 2 Bcf/d of associated gas that produce about 700,000 b/d of NGLs.

The attacks come at a time when the global oil market appears to be tightening, driven by OPEC production cuts, Venezuela's collapsing crude output and US sanctions that have slashed Iran's oil exports.

Saudi Arabia sought to reassure customers that crude supplies would see limited impact from the attacks.

Saudi Aramco was able to "put out the fires that resulted from this terrorist act," the company said in Sunday statement. Aramco CEO Amin Nasser said the company is working to restore production, and further updates will seen over the next 48 hours, according to the statement.

According to the Wall Street Journal, national oil company Saudi Aramco was looking to bring back a third of lost crude output by end of the day Monday.

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.

MIDDLE EAST RISKS MOUNT

Analysts said Aramco's significant volumes of oil in storage should help keep exports flowing and mitigate any disruption in the short term. Saudi stockpiles totaled 187.9 million barrels in June, according to the Joint Organization Data Initiative. This implies that the kingdom has 26.8 days of cover, assuming zero crude production.

However, oil traders will price in the relative ease by which the attack was made on such a crucial piece of oil infrastructure, 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.

Iran-aligned Houthi rebels in Yemen claimed responsibility for the attack. But US Secretary of State Mike Pompeo blamed the attacks on Iran, saying on Twitter, "There is no evidence the attacks came from Yemen."

Iran subsequently denied the accusations, and issued a warning to the US.

"Everybody should know that all American bases and their aircraft carriers in a distance of up to 2,000 km around Iran are within the range of our missiles," said the head of Iran's Revolutionary Guard's air force, according to press reports.

Still, US President Donald Trump's "aversion to foreign entanglements creates very low odds of a military response to this or any other incident short of an attack on US people or strategic assets," S&P Global Platts Analytics said. "This raises the odds that Saudi Arabia and its Gulf allies will act on their own. Covert or proxy actions in Iran are possible, while Iran will continue to test limits in the region, creating clear and plausible paths to a disruptive escalation."

SPARE CAPACITY TIGHT

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."

Platts Analytics said global crude stocks have tightened by 100 million barrels over the past two months, and 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.

"This should make markets especially nervous given uncertainties in Yemen, Iraq, Libya, and elsewhere," Platts Analytics said. "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."

OPEC PLANS

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.

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."

-- Staff report, newsdesk@spglobal.com

-- Edited by Jason Lindquist, newsdesk@spglobal.com