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Saudi attacks, supply risk could cause prices to test $80/b: S&P Global Platts Analytics

Highlights

Saudi likely to maintain exports, use reserves in near term

Spare capacity may be at risk by direct, serious offensive

Attacks on Saudi Arabia's Abqaiq processing facility and Khurais oil field likely will cause oil prices to climb above $70/b and may test $80/b, analysts with S&P Global Platts Analytics said Saturday.

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"The sudden change in geopolitical risk warrants not only an elimination of the $5-10/b discount on bearish sentiment, but adds a potential $5-10/b premium to account for now-undeniably high Middle Eastern dangers to supply and the sudden elimination of spare capacity," the analysts wrote. "As such, prices are likely to break out of the $55-65/b options range, more likely testing the high $70/b previously forecast, if not higher."

They wrote that any additional risk premium "could see prices test $80/b despite Saudi Arabia today claiming production and exports will not be significantly impacted."

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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.

Platts Analytics analysts wrote that with the estimated 5 million b/d disruption from the attacks, Saudi Arabia will likely be able to maintain exports and use reserves in Japan to ensure supply security. If the disruption is prolonged, they wrote, OPEC spare capacity will be "heavily" impacted as will the International Energy Agency's ability to tap Strategic Petroleum Reserves to meet a potential supply shortfall.

Of greater possible significance for the market, however, the attacks may show "an alarming level of effectiveness and sophistication, and more importantly a change in tactic towards a more direct and serious offensive," they wrote.

Platts Analytics estimates that global spare capacity is currently 2.3 million b/d, but more than 1.6 million b/d is in Saudi Arabia, showing how vulnerable the market is to supply-side risks.

"This should make markets especially nervous given uncertainties in Yemen, Iraq, Libya, and elsewhere," they wrote. "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."

Platts Analytics wrote that demand-side concerns have caused potential supply instability in the Middle East to be relatively overlooked.

"With a perceived limitation in the upside to oil prices, funds have held record short to long CFTC position which have weighed down on the market," they wrote. "This may change after today's attacks."

Saudi Arabia confirmed late Saturday the temporary loss of 5.7 million b/d of oil production after attacks on its facilities, but said export customers would continue to be supplied from inventories.

"Work is under way to restore production and a progress update will be provided in around 48 hours," Amin Nasser, CEO of Saudi Aramco, said in an emailed statement Saturday.

Drone attacks Saturday set on fire oil facilities at Abqaiq and Khurais. Located in the kingdom's eastern province, plants in Abqaiq process around 7 million b/d of crude, roughly equal to the country's entire exports. Khurais, about 250 km southwest of Dahran, is the second-largest oil field in Saudi Arabia with capacity to pump around 1.5 million b/d of mainly Arab Light crude.

-- Brian Scheid, brian.scheid@spglobal.com

-- Andy Critchlow, andrew.critchlow@spglobal.com

-- Edited by Christopher Newkumet, newsdesk@spglobal.com