Oil prices surge after attacks halve Saudi oil production

Oil prices rose some 20% after an attack on Saudi Arabia’s Abqaiq oil processing plant and the Khurais oil field on 14 September led to a 50% reduction in the country’s oil production.

Iran-aligned Houthi rebels in Yemen were initially reported to be the source of the drone attacks on the two Saudi Aramco oil facilities, which Saudi Aramco reported would reduce output by around 5.7mn b/d. However, the US blamed Iran, issuing satellite images and citing intelligence reports to back its claim; a charge that Iran denied.

The incident cut global oil supplies by some 5% and prices soared to above $71/b in response.

Commenting on what is reportedly the biggest attack on oil infrastructure since the Gulf War, Bjørnar Tonhaugen, Head of Oil Market Research at Rystad Energy, said:  ‘The bullish reaction in oil prices will likely be limited by Saudi Arabia’s vast quantities of crude in storage, estimated to equal roughly 26 days of current crude exports, a large portion of which is at the main export terminal Ras Tanura. The country also has strategic storage facilities in Rotterdam, Okinawa and Sidi Kerir (Egypt).’

‘The world is not even close to being able to replace more than 5mn b/d of Saudi Arabian exports. The market’s reaction to Saudi Arabia’s importance, in the new era of US shale, will now be put to the test,’ he continued.  

The longer the processing facility remains disrupted, the larger the potential impact on actual crude flows will be.

‘In a scenario where the damages result in a longer duration of the 5.7mn b/d production shut-in, say for 10 days or more, the situation for Saudi Arabian crude flows to the market will be critical, in our view, as there are limits globally to the volume of export replacement barrels. Strategic Petroleum Reserves in the OECD countries would then be called upon. The US stands as one of the few countries that would be able to increase exports in the short term. We believe US crude exports could potentially be increased by about 1mn b/d, from 3–4mn b/d, if prices allow for higher utilisation of the current crude exports capacity. Other countries with available capacity to increase exports by a few hundred thousand barrels per day each include UAE, Russia, Kuwait and Iraq.’

Saudi Arabia has approximately 185mn barrels of crude stocks in storage currently, and has drawn down its domestic crude stockpiles by more than 40% (or 140mn barrels) since 2015, according to Rystad Energy. A large part of the storage is located near crude loading terminals, with storage capacity at Ras Tanura estimated at 60mn to 70mn barrels, representing 10 to 11 days of normal crude exports from the terminal.

‘The global flow of crude oil will not be disrupted immediately, Rystad Energy believes, due to storage capacity at the main export terminals. However, the longer the processing facility remains disrupted, the larger the potential impact on actual crude flows will be,’ Tonhaugen concluded.

Abqaiq oil processing plant (before attack)
Photo: Saudi Aramco