Providing coverage of Alaska and northern Canada's oil and gas industry
September 2019

Vol. 24, No.37 Week of September 22, 2019

Strike on Saudi facilities impacts oil

Crude oil prices spike up after attacks on oil processing plant suspends 5.7 million barrels of crude, halts 5% world oil output

Kristen Nelson

Petroleum News

A Sept. 14 attack on Saudi Aramco facilities at Abqaiq and Khurais resulted in a production suspension of 5.7 million barrels of crude oil per day, Saudi Aramco said in a statement. Amin H. Nasser, Saudi Aramco president and CEO, said there were no injuries, and on Sept. 17 Nasser said Saudi Aramco’s production capacity would be fully restored by the end of September.

Production at Khurais resumed 24 hours after the attack, Saudi Aramco said, and Nasser said Sept. 17 that production at Abqaiq was 2 million bpd.

Oil prices surged following the strike on the Saudi Aramco facilities and then dropped, but not to prior attack levels.

The Associated press reported that prices spiked by 15% Sept. 16 after the weekend attack and called it an increase on par with the 1991 Gulf War.

The attacks on Saudi Arabia’s largest oil processing plant disrupted more than half of the kingdom’s daily exports, halting 5% of world crude oil output, AP reported.

Fires began at the facilities after the attacks by drones, AP reported, citing a statement carried by the Saudi Press Agency.

Brent, ANS, WTI all up

Closing prices Sept. 13, the day before the attacks, were $60.22 per barrel for Brent (down 16 cents from the previous day), Alaska North Slope crude $61.95 (down 34 cents) and West Texas Intermediate $54.85 (down 24 cents).

Sept. 16, the first weekday after the attacks, Brent was $69.02 (up $8.80), ANS was $69.59 (up $7.64) and WTI was $62.90 (up $8.05).

Bloomberg reported Sept. 17 that crude oil prices fell that day after the statement from Saudi Arabia. The kingdom pumped almost 10% of the world’s oil before the attacks, Bloomberg said, adding that “Saudi Arabia’s industry will remain weakened for months as it depletes oil reserves to meet supply commitments and operates without its usual buffer of spare production capacity.”

Prices fluctuated as the Saudis brought production back online. By Sept. 18, the most recent prices available when this issue went to press, Brent was at $63.58 and WTI at $58.63. The latest price for ANS, from Sept. 17, was $65.88 per barrel.

Potential impacts

IHS Markit provided insights Sept. 17, categorizing potential market impacts in what it called three time dimensions - limited, seven to 14 days; extended but manageable, 30-120 days; and structural, 120 days plus.

“What was a risk scenario has become a reality,” said Daniel Yergin, vice chairman, IHS Markit. “The amount of Saudi oil offline is equivalent to one third of what passes every day through the strait of Hormuz. Two things will jangle the oil market in coming days - how long the recovery and what comes next.”

A limited impact (one to two weeks) has a low likelihood, IHS Markit said, given the extent of the attack suggesting at least some level of sustained damage. In this scenario there is initial restart in week one followed by a measured ramp up in the second week, leading to a gross disruption in the 30 million to 60 million barrel range “and should be manageable through any combination of Saudi stocks and global commercial inventories, with Saudi Arabia ostensibly surging post return to offset the net tightening caused by its temporary decline.”

IHS Markit said the extended but manageable scenario of one to four months is most likely, with Saudi Arabia able to manage a partial return from the peak disruption of 5.7 million bpd but “unable to address the full extent of the damage on key facilities for as long as four months,” leading to disruption in the 150 million to 300 million barrel range, exceeding the ability of commercial inventories to meet the shortfall and resulting in higher prices.

“Global markets will likely look to extraordinary measures to mitigate the physical shortfall caused by the disruption, including a coordinated SPR stock release from the IEA, a potential call on China to ease market pressure through inventories, and call for increases in production from within the Vienna Alliance.”

The worst case scenario, IHS Markit said, would mean Saudi output would be out for longer than four months, with the physical shortfall rising to the 350 million to 500 million barrel range. Prices would spike in this scenario and extraordinary measures would be insufficient and eventually reactive supplies such as from the United States, via higher prices, would be needed to correct the structural imbalance.

But, IHS Markit said, given the importance of the facility to Aramco and prioritization of repairs regardless of cost by the company, it would be unlikely that a full shutdown would endure beyond four months “unless damage is more extensive from the attacks than anticipated, or a large-scale conflict breaks out.”

“Under any scenario, the heightened risk premium marks a stunning reversal for the market,” said Rogen Diwan, vice president, IHS Markit. “The combination of weak demand fed by macroeconomic fears and the potential for a U.S.-Iran détente unlocking significant volumes of oil currently under sanction had weighed on the market. Now an enduring increase in the market’s risk premium is justified.”

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