Drone Strikes on Saudi Arabia Cause Surge in Oil Prices

On Saturday the 14th of September, the world’s largest oil-processing plant Abqaiq and the Khurais oilfield in Saudi Arabia were attacked by a fleet of ten drones, starting fires that have since halved the output of the world’s largest exporter of oil. The immediate impact, according to Aramco, is a loss of five million barrels of oil per day, which equates to 60-70% of the kingdom’s production and roughly one in twenty barrels or 5-6% of the global supply. The attack was claimed by Yemen’s Houthi insurgents backed by Iran, and has bolstered existing tensions in both Middle East geopolitics and oil markets, rippling into the global markets. These attacks plague the Middle East oil supplies with uncertainty, adding to the existing strain induced by US sanctions on Iran.

Saudi Arabia Oil Plant
Source: Oil and Gas Middle East

The prices of crude oil have soared, Brent crude rose from US$60.22 on Friday to US$72, more than 19% on ICE Futures Europe, on Monday when the market opened, which is the largest intraday advance in dollar terms since 1988. US oil futures jumped 11% reaching US$60.98 per barrel in early trade. Brent crude receded slightly following the trading frenzy in the market, setting the global benchmark just under US$70. The share prices of Australian oil producers were also pushed up, BHP was up 6% when trading opened. Oil prices are predicted to rise further, NAB estimates as much as US$80 to US$90 a barrel over the forthcoming months, though this is heavily contingent upon the extent to which the outage is prolonged and the possibility of Saudi retaliation.

However, analysts persisted that oil prices are likely to be quite volatile, following the disclosure of more information from Saudi Arabia as investigation takes place, as well as the spike in trading. Australia’s energy minister Angus Taylor insisted that the disruption is one that affects commercial stocks worldwide, thus the “impact will be determined by global stocks not Australian stocks” and that there was no “immediate” threat to Australian fuel stocks. Nevertheless, difficulties can arise due to Australia’s dependence on imported liquid fuels, which rely on Saudi oil.

Saudi Arabia Oil Plant
Source: Bloomberg

Saudi Arabia’s crude stockpile is likely to be the preferred measure to sustain exports to customers, using their own storage tanks in the kingdom as well as those it retains in Egypt, the Netherlands and Japan. The International Energy Agency and the US Department of Energy have also assured that there are ample emergency reserves in the event of long lasting reduced supply. President Donald Trump tweeted that he has “authorised the release of oil from the Strategic Petroleum Reserve” and has “informed all appropriate agencies to expedite the approvals of oil pipelines currently in the permitting process in Texas and other states”.

On the other hand, Saudi Arabia’s crude stockpile has reduced to the same levels it had in 2008, which significantly interferes with their ability to counteract these monumental production losses and there is debate as to whether the US and other OPEC members’ inventories would be able to suffice. Analysts predict that the US is likely to boost shale production, especially if the outage exceeds three months, which is expected to occur, as not only has daily oil production been halted, but 2 billion cubic feet of gas output is currently offline.

Following sanctions on Iran and Venezuela, uncertainty and fear has been boiling in the markets causing volatility in prices for some time now, speculating that the demand for crude oil may exceed supply, however Saudi Arabia has been actively involved in stabilizing prices so far with its fellow OPEC members. Neighbouring countries such as the United Arab Emirates, Kuwait and Iraq are already dedicated to expanding output, adhering to output quotas agreed upon in December.

Saudi Arabia map of Khurais Oil Field
Source: The Financial Times

One of the crucial questions circling the situation is how this may affect Aramco’s long-awaited IPO, which is expected to be one of the largest initial public offerings in history. It was only last week that the former Saudi energy minister and now-former chairman of Aramco was dismissed for the company’s many hits-and-misses struggling to achieve its primary goal of raising oil prices to US$80 a barrel. Moreover, though the surge in oil prices bringing the Saudis closer to their target may be welcomed, the market upheaval and inherent uncertainty can conversely bring more harm than good.

Aramco’s IPO is a central tenet of de facto ruler Crown Prince Mohammed Bin Salman’s plan to diversify the economy of Saudi Arabia by 2030 and  Aramco’s debut international bond sale earlier this year in April, captured the attention of traders and analysts worldwide. This came after conducting an independent audit of the kingdom’s oil reserves and the company’s publication of its earnings. The contraction in supply, forcing up oil prices makes Aramco a more valuable company, however fears of repeated attacks or military retaliation could further destabilise global markets, and this risk can devalue Aramco’s IPO.

Furthermore, the attack will also test oil-consuming countries like India and China, as Saudi Aramco is a major supplier of oil to Asia; not to mention that China is the world’s second largest economy importing oil and Saudi imports account for 15% of China’s crude imports. These countries are also likely to turn to stockpiles until production recuperates, possibly turning to US exports, though it is anticipated that Japan, Korea and Taiwan will tend towards North Sea and West African crudes.

Feature Image.

By Mariam Melkonyants