Geopolitical Escalations in the Middle East
On September 14th, 2019 two of Saudi Aramco’s major crude oil processing fields came under a drone attack. This attack was aimed at the “Abqaiq plant,” which is one of the largest oil stabilization plants and the “Khurais facility,” which is Saudi Arabia’s second largest oil field.
Plant Shut down possibilities :
- The two facilities account for roughly 10 million barrels of crude oil production and the temporary shutting down of these facilities takes out 50% of Saudi Arabia’s production (5% of the global production) from the market.
- While the duration of the shutdown of the facilities is yet to be announced by Saudi Aramco, the price of crude oil is spiking in the international market.
- Shutdown of more than 6 weeks could drive Brent crude oil prices up to 75-85 $/bbl. for the Q4 2019 and Q1 2020.
- This attack is one of the most severe in the series of drone attacks the country has faced in 2019.
- The continuous trend of such attacks is also expected to keep the crude oil market volatile.
- The prices are expected to show an uptrend due to the geopolitical tension in the region among Saudi Arabia, Iran, Oman, and militant groups in the region.
The impact on the supply in the market is strongly dependent on the duration of the shut down of the facilities in Saudi Arabia. A shutdown for more than 3-4 weeks is expected to affect the prices in the long term. However shorter shutdowns may not strongly affect prices as the current market inventory and reserve supplies will reduce the impact of the shut down.
- The current shutdowns have reduced the daily global crude oil production capacity by 5%, which is one of the largest disrupting events in four decades.
Long-Term Price Impact: Unlikely, if the facilities come back online before 3-4 weeks of shutdown
- As Saudi Arabia is a key ally to the U.S., to keep the market supply steady, the U.S. president has authorized increasing supply in the market from the SPR (Strategic Petroleum Reserves) if needed.
- The market supply shock is not expected to be seen in the short term as both the U.S. and Saudi Arabia are expected to supply from their SPRs and inventories. However, based on the duration of the shutdown and the usage of reserves, the market is expected to sustain an increase in price for the medium term.
Short-Term Price Impact: Unavoidable, as the market recognizes the uncertainty of crude oil supply from the largest producing region
- The event has strongly impacted spot market prices as the market increased Brent crude oil prices by around 10% to reach 66.72 USD/bbl. on 16th September.
- The short-term market reactions also affected the crude oil futures market, where the prices are traded at higher prices owing to the current shock in the supply.
Saudi Crude Oil Exports
Saudi Arabia is the major source of crude oil for energy intensive Asian countries such as China, India, and Japan. However, the supply to these countries is not expected to be interrupted, as per statements from Saudi Aramco to Indian refineries. Saudi Arabia’s current oil inventory is expected to supply the shortage in production, until the Abqaiq facility comes online.