16th September, 2019
Forty eight hours after the drone attacks on Saudi oil facilities, Brent crude price reopened early Monday
appreciating between 15- 20 per cent, its biggest jump in 28-years, in what may be a boon to exporters such as Nigeria.
Bloomberg reported that the weekend attack has resulted in the single-worst disruption in oil markets ever, surpassing the loss of Kuwaiti and Iraqi petroleum supply in August 1990, when Iraq invaded its southern neighbour.
It also exceeds the loss of Iranian oil output in 1979 during the Islamic Revolution, according to data from the U.S. Department of Energy.”
The drone attacks on a Saudi oil field and a crude processing facility, the world’s largest, knocked out more than 5% of global oil supply.
Brent crude futures jumped more than 19% to a session high of $71.95 a barrel at the opening, while U.S. crude futures surged more than 15% to a session high of $63.34 a barrel. Both benchmarks rose to the highest since May.
Prices were up about 12% by 6:50 p.m. (2250 GMT), as gains were capped after U.S. President Donald Trump said he authorized the release of oil from the U.S. Strategic Petroleum Reserve (SPR) if needed in a quantity to be determined because of the attack on Saudi’s facilities.
State oil giant Saudi Aramco said the attack cut output by 5.7 million barrels per day, at a time when Aramco is trying to ready itself for what is expected to be the world’s largest share sale.
Aramco gave no timeline for output resumption. A source close to the matter told Reuters the return to full oil capacity could take “weeks, not days.”
Saudi Arabia’s oil exports will continue as normal this week as the kingdom taps into stocks from its large storage facilities, an industry source briefed on the developments told Reuters on Sunday.
“The surge in prices is the natural knee jerk reaction but the path ahead and ability to sustain at elevated levels remains dependent on the duration of the outage, the ability to meet export commitments through domestic drawdowns, demand elasticity at higher prices as well as government and agency policy,” said Michael Tran, managing director of energy strategy at RBC Capital Markets in New York.
“Even if the outage normalizes quickly, the threat of sidelining nearly 6% of global oil production is no longer a hypothetical, a black swan or a fat tail. Welcome back, risk premium.”
The attack on plants in the heartland of Saudi Arabia’s oil industry, including the world’s biggest petroleum-processing facility, came from the direction of Iran, and cruise missiles may have been used, according to a senior U.S. official.
“Saudi authorities have claimed to control the fires, but this falls far short of extinguishing them,” said Abhishek Kumar, head of analytics at Interfax Energy in London.
“The damage to facilities at Abqaiq and Khurais appears to be extensive, and it may be weeks before oil supplies are normalised,” Kumar said.
Saudi Arabia is set to become a significant buyer of refined products after attacks on Saturday, consultancy Energy Aspects said in a note.
State oil firm Saudi Aramco will likely buy significant quantities of gasoline, diesel and possibly fuel oil while cutting liquefied petroleum gas exports.
U.S. gasoline futures jumped 11%, while U.S. heating oil futures rose about 6.5% at the open.
Furthermore, in light of news that the Saudi outage could last for months, this could be just the start. As a reminder, according to Morningstar research director, Sandy Fielden, “Brent could go to $80 tomorrow, while WTI could go to $75… But that would depend on Aramco’s 48-hour update.
The supply problem won’t be clear right away since the Saudis can still deliver from inventory.”
Of course, should Aramco confirm that the outage will last for weeks, expect the Brent onslaught to continue until the price hits $80, and keeps moving higher.