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Saudi attacks raise spectre of oil at $100 per barrel

  • Published at 12:18 am September 16th, 2019
Saudi drone attack
Smoke is seen following a fire at an Aramco factory in Abqaiq, Saudi Arabia, September 14, 2019 in this picture obtained from social media Reuters

Industry sources have said it may take weeks to bring production fully online

The oil market will rally by $5-10 per barrel when it opens today and may spike to as high as $100 per barrel if Saudi Arabia fails to quickly resume oil supply lost after attacks over the weekend, traders and analysts said.

Attacks on two plants at the heart of the kingdom's oil industry on Saturday knocked out more than half of Saudi crude output, or 5% of global supply.

Industry sources have said it may take weeks to bring production fully online.

Greg Newman, CEO of Onyx Commodities, expects Brent futures to open $2 per barrel up and close $7 to $10 per barrel higher today. He said, “The market could see a return to $100 per barrel if the issue cannot be resolved in the short term.”

Christyan Malek, head of EMEA oil & gas research at JPMorgan, said, "This attack introduces a new, irreversible risk premium into the market."

“I’d expect a rise to $80-90 a barrel over the next three-six months as the market turns its focus to geopolitics.”

The Iranian-backed Houthis group in Yemen claimed responsibility for attacks that shut two plants at the Abqaiq facility, the heart of the Saudi oil industry, which will cut the kingdom's production by about 5.7 million barrels per day (bpd), more than half of the kingdom's output, according to a statement from state-run Saudi Aramco.

"Oil prices will jump on this attack, and if the disruption to Saudi production is prolonged, an SPR release ... seems likely and sensible," said Jason Bordoff, founding director of the Center on Global Energy Policy at Columbia University in New York.

It is too early to know the extent of the damage to the processing plants and the Saudi supply chain that brings crude from oil fields to export facilities. The chief executive of Saudi Aramco, Amin Nasser, said in a statement that the company will have more information within 48 hours, as it works to bring back the lost output.

Aramco exported more than 7 million barrels per day (bpd) of crude last year, with almost three-quarters of its crude exports delivered to customers in Asia last year. The country has about 188 million barrels in reserve, or roughly 37 days of Abqaiq's processing capacity, according to a Saturday note from Rapidan Energy Group.

Saudi to tap vast oil stores

Saudi Arabia will use its vast oil reserves to offset disruption to production, its energy minister said yesterday.

"Part of the drop will be compensated to clients" from storage facilities, new energy minister Prince Abdulaziz bin Salman said in a statement on the official SPA news agency.

Riyadh has built five giant underground storage facilities in various parts of the country that can hold tens of millions of barrels of various refined petroleum products, to be tapped during times of crisis.

The facilities were constructed between 1988 and 2009 and cost tens of billions of dollars. 

Prince Abdulaziz said Saturday's explosions also halted supplies of some two billion cubic feet of associated gas - which is extracted along with the crude.

"As a result, ethane and LNG supplies will shrink by 50%," said the minister, adding that domestic supplies of fuel, electricity and water had not been affected.

As markets closely watch the Opec kingpin's ability to get its industry back on track, Aramco CEO Amin Nasser said that "work is underway" to restore full production.

Abqaiq, the world's largest oil processing plant, is located near Ghawar oilfield, the biggest in the world with reserves of over 60 billion barrels and a daily output capacity of six million bpd. 

The plant also receives crude oil and gas from Shayba oilfield in the Empty Quarter.

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