Brent crude surged by more than 15 per cent after Saudi Aramco plants were attacked in drone strikes, bringing down production by almost a half for the world’s largest oil exporter.
Aramco plants Abqaiq and Khurais were hit by “terrorist attacks with projectiles” a statement by Saudi Aramco said.
Abqaiq and Khurais are main processing centres for Saudi Arabia's Arab Extra Light and Arab Light crude oil, to prepare the crude for export.
The attacks, which come ahead of the largest ever planned initial public offering of Saudi Aramco shares, have resulted in production suspension of 5.7 million barrels per day of crude, or about 5-7 per cent of global oil supply.
This is expected to take weeks to be restored, according to some analysts, although the company has not given a timeline for the resumption of full output.
Amin H. Nasser, Saudi Aramco President & CEO of Saudi Aramco, said in the statement: “Work is underway to restore production and a progress update will be provided.”
Brent crude jumped to as much as US$68.42 per barrel early Monday, but has eased slightly to around $66.71.
The price surged eased after U.S. President Donald Trump said in a tweet that he has ordered the release of oil from the Strategic Petroleum Reserves, an emergency store, “if needed, in a to-be-determined amount sufficient to keep the market well-supplied.”
Energy minsters of United Arab Emirates and Russia have said that there is enough stockpile to cover any market shortfall but oil prices and sentiment remains pressured.
Alan Gelder, Wood Mackenzie VP for refining, chemicals and oil markets said the attack has material implications for the oil market, as a loss of 5 million barrels per day of supplies from Saudi Arabia cannot be met for long by existing inventories and the limited spare capacity of the other OPEC+ group members. "A geopolitical risk premium will return to the oil price.”
Impact and risks
Bjørnar Tonhaugen, head of oil market research at Rystad Energy said Saudi storage is estimated to equal roughly 26 days of current crude exports, a large portion of which is at the main export terminal Ras Tanura. The country also has strategic storage facilities in Rotterdam, Okinawa and Sidi Kerir (Egypt).
“The world is not even close to being able to replace more than 5 million bpd day of Saudi Arabian exports. The market’s reaction to Saudi Arabia’s importance, in the new era of US shale, will now be put to the test,” Tonhaugen said.
The longer the processing facility remains disrupted, the larger the potential impact on actual crude flows will be.
“In a scenario where the damages result in a longer duration of the 5.7 million barrels per day production shut-in, say for 10 days or more, the situation for Saudi Arabian crude flows to the market will be critical, in our view, as there are limits globally to the volume of export replacement barrels,” Tonhaugen added.
The U.S. stands as one of the few countries that would be able to increase exports in the short term - this could be increased by about 1 million bpd, from 3 million to 4 million bpd, if prices allow for higher utilisation of the current crude exports capacity, he said.