Attack on Saudi Oil Facilities - Quick Analysis

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By: Kamalakannan N
Senior Research Analyst

calender21 Sep 2019

attack-on-saudi-oil-facilities-quick-analysis

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.

major-refineries

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 price of crude oil is spiking in the international market, Saudi Arabia has said that it will restore its lost oil production by the end of September. The country also managed to recover supplies to customers to the levels they were at prior to weekend attacks on its facilities by drawing from its huge oil inventories, according to Reuters.
     
  • Shutdown of more than 6 weeks could drive Brent crude oil prices up to $75-85 /bbl. for the Q4 2019 and Q1 2020.
     

Trend :

  • 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.

Supply Impact

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 /bbl on Sept. 16
     
  • 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.
 

saudi-crude-oil-exports-by-country

The major Asian markets are the largest importers of crude oil from Saudi Arabia. The majority of crude oil trades happen via long-term contracts.

Country

Countries with greatest dependency on Saudi crude oil Supply

(% of Crude oil import from Saudi Arabia)

Japan

33%

China

12%

India

19%

Unites States

9%

Even though supply is not expected to be interrupted, the price of crude oil imports is expected to increase in these countries as the global crude oil supply is to be reduced until the reopening of the Abqaiq facility.

Impact on other Energy Commodities

Impact of Saudi Aramco supply disruption on other commodities are outlined below.

Parameter

Implications

Price Impact

Short Term (0-5 months)

Long Term (6-12 months)

Liquid Fuels

  • The spot prices of liquid fuels are expected to increase in the short term
  • In the long term, liquid fuel prices will stabilize and will track the easing of crude oil price
liquid-fuel

Natural Gas

  • The price increase of crude oil will influence gas prices, but significant impact is not expected
  • Most natural gas production markets remain unaffected as their production is secure
natural-gas

Coal

  • Coal markets are expected to remain unaffected as the common end use market, electricity generation, has significantly reduced dependency on oil over the years
  • Currently power generation from oil has fallen to around 2% of the global power production
coal

Hydrocarbon Gases

(LPG, Ethane, Propane, Butane)

  • The supply of Ethane and Butane are not expected to be impacted
  • However in the short term, prices are expected to increase in line with crude oil prices
  • The long-term impact depends on the total shutdown duration of the plants
  • With strong reserve capacity, the gases’ production/prices are not expected to be impacted in the long term
hydro-carbon-gases

 

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