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Global Oil Prices at Risk following Saudi Aramco Attack

Aramco oil company
Employees of Aramco oil company stand near a heavily damaged installation in Saudi Arabia’s Khurais oil processing plant on September 20, 2019. Photo: Fayez Nureldine / AFP ©AFP ⁃ Fayez Nureldine

Since the attack on a major Saudi oil facility on 14 September 2019, fluctuating prices on oil markets have caused confusion among buyers and investors.

The price of oil dropped more than 2.6 per cent on 25 September, after Saudi Arabia announced that oil production would be back to normal the following week despite the damage done to the facility.

The announcement followed contradicting reports the previous day that it would take months for normal production to resume.

A swarm attack of drones and missiles hit the Abqaiq production plant and Khurais oilfield in the Eastern Province. Houthi rebels in Yemen claimed responsibility for the strike, but the United States (US) along with France, Germany and the United Kingdom blamed Iran.

Tensions in the Middle East have since risen, and the Pentagon increased its small troop deployment to support Saudi defences.

The facility belongs to the state-owned energy company Saudi Aramco and accounts for around 5 per cent of the world’s oil production.

“The sudden fluctuation is mostly due to market fears that can be more or less rational,” said Ludovic Leroy of the French Petroleum Institute.

“As an example, a tweet from [US President] Donald Trump or a statement from Saudi officials, even if not realistic, can be sufficient to move that price by several dollars,” he said.

Stable prices are important for the global economy and particularly investors in order to accurately forecast costs. Inevitably, oil prices impact businesses.

Saudi Aramco reportedly had 50 million barrels of oil in storage prior to the attack and a total of 80 million barrels of usable and unusable oil at global ports.

The company is keen to maintain export levels even if it has to draw on reserves. It may, however, sacrifice product exports and cut refining to free up crude oil. It will also reportedly restart production at its offshore oilfields and ask customers to take different grades of crude.

“Saudi officials have been communicating quite quickly to reassure the market and [particularly] Asia, the biggest Saudi customer for crude,” Leroy noted.

Limiting supply has been a key strategy of the Organization of the Petroleum Exporting Countries (OPEC) to keep oil prices from dipping, and Brent crude prices have risen 18 per cent this year.

With the kingdom’s current reserves as well as reserves from International Energy Agency (IEA) member countries, the official line has been that supply is adequate to keep the market going.

One source told Reuters news agency that Saudi Arabia had already restored more than 75 per cent of the crude output lost.

Leroy said some scepticism around this statement is understandable given that importers like China are being offered different grades of crude – medium instead of light – and that the waiting times of supertankers or very large crude carriers are increasing.

With the plant requiring up to $1.8 billion of repair work and taking into account the satellite images and pictures circulating on social media, Leroy estimated that it would take eight months to resume pre-attack production levels.

“In my opinion, we can definitely raise some concerns about the official statements’ veracity and the ability of the kingdom to fulfil its supply contracts,” he said, adding that there are doubts the petrostate will even be able to fulfil domestic requirements.

Prior to the attack, supply had not been a problem, which is why issues impacting other oil-producing countries – the economic and political crisis in Venezuela, war in Libya, US sanctions against oil exports from Iran – had not raised supply-side concerns. That has changed now.

Oil prices are also impacted by poor eurozone growth and slow manufacturing data.

“The geopolitical risk premium has returned with a vengeance and supply-side developments have been thrust back into the spotlight,” according to PVM’s Stephen Brennock.

“While Saudi oil facilities smoulder, the potential for fresh outages in Nigeria, Libya and Venezuela continues to hang over the market,” he said.

As oil prices change, there are ultimately winners and losers. India and Turkey would have been among those most impacted by rising oil prices and diminishing supply. India, which depends heavily on oil and has not made the energy efficiency gains seen in other countries, imports over 80 per cent of its oil.

Turkey is also a large importer, bringing in almost 85 per cent of its oil. The impact of each 10 per cent increase in the price of oil would increase the deficit in the countries’ current account by half a per cent.

Russia, on the other hand, would be a clear winner from higher oil prices as its balance improves by 1.2 per cent of GDP for each 10 per cent price increase.

Low prices will have the opposite effect.

Ultimately, Saudi Arabia’s income will be hit. Moreover, any furtherance of Saudi Aramco’s proposed initial public offering, which is the main financing tool of the kingdom’s Vision 2030 to help diversify the nation’s economy away from oil, is reportedly now on hold.

Emergency oil stocks from IEA member countries amount to 1.55 billion barrels in government-controlled agencies and 2.9 billion barrels of industry stocks that could add to global supply if needed. In a recent statement, Fatih Birol, the IEA’s executive director, stressed the importance of energy security to protect the markets and economy from hits like the one on Saudi Arabia.

“Recent events are a reminder that oil security cannot be taken for granted, even at times when markets are well supplied, and that energy security remains an indispensable pillar of the global economy,” he said.

“This is why the IEA remains vigilant about the risk of disruptions to global oil supplies, whether they are caused by extreme weather events such as hurricanes, major technical outages or geopolitical crises, and stands ready to act when needed.”

Leroy noted that Saudi Aramco’s production costs have been among the lowest globally, in response to generally low demand and requests for lower pricing. Adhering to requests for production costs from OPEC had not been as effectual as anticipated, however, due to a US crude explosion that kept the market well-supplied.

Higher costs and higher prices could arise if Saudi Arabia fails to supply its customers. “This would obviously not be positive for the kingdom as it would lose its market shares, which today, seems to be the most important goal for Saudi Arabia,” he said.

Considering the target and extent of the attack, oil prices have remained relatively stable. There could be well-founded concerns on the horizon, however, given the less than clear messaging on the damage caused to the Saudi facility and its ability to fulfil supply commitments. We could, in fact, see oil prices rise well above the norm while any other hits in oil-producing countries could tip the balance.

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©AFP ⁃ Fayez Nureldine | ©AFP ⁃ Fayez Nureldine

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