Aramco Attacks Spark Largest Oil Supply Cut Since Gulf War, What Next?
AP Photo / Michael MipchitzBusiness17:52 17.09.2019(updated 17:52 22.09.2019) Get short URLby Ilya Tsukanov13320Subscribe
Saturday’s attacks on two Saudi Aramco facilities led the oil-rich kingdom to cut its production by 5.7 million barrels per day, or around half of its total daily output, and roughly 5 percent of total global oil production.
Bloomberg has crowned the weekend’s dramatic attacks on Saudi oil facilities the largest supply disruption in history, with the cuts surpassing those which resulted from the Iranian Revolution in 1979, and the losses of Kuwaiti and Iraqi supplies during the Gulf War of 1990-1991. For comparison, those disruptions led to losses of as much as 5.6 and 4.3 million barrels per day, respectively.
Markets reacted to the cut accordingly, with crude prices surging across the board on Monday, seeing their largest single-day spike since 1988, with West Texas Intermediate futures jumping by 14.7 percent to $62.90, while global benchmark Brent finished up 14.6 percent, at $69.02. Gasoline futures saw a similar climb, up by over 13 percent in trading after initially spiking upwards by as much as 18 percent.
Prices pulled back slightly in early Tuesday trading on the New York Mercantile Exchange, with WTI down about -1.5 percent, while November Brent slipped by -1.72 percent at the time of writing.
Markets remain jittery, however, amid uncertainties in the region as Washington and Riyadh mull their next move. Despite repeated claims by Yemen’s Houthi militia that they were responsible for the attacks, the US has accused Iran, with Riyadh similarly indicating Monday that a preliminary investigation found that the attacks “came from Iran.” Tehran vocally denied these claims, while Russia, China and the UN’s special envoy for Yemen have asked for further investigation. Moscow and Beijing also called on all sides to refrain from “any actions that would cause escalation,” and said they consider talk of “military options” in response to the attacks as “unacceptable.”
The Trump administration and Saudi Aramco have each made an effort to assure customers that they would do what’s necessary to prevent instability in oil markets, with the US president tweeting that he had authorised the release of oil from the US’s Strategic Petroleum Reserve, if needed, “to keep the markets well-supplied.” It’s noteworthy that the US’s Strategic Reserve has previously been used on only three occasions – during the Gulf War of 1990-1991, in 2005 due to oil production disruption in the Gulf of Mexico after Hurricane Katrina, and in 2011, during the NATO-led bombing campaign against Libya.
Saudi officials, meanwhile, have assured US media that Riyadh would restore a third of its lost production soon, but added that the situation at its refineries was ‘worse than initial assessments’ had suggested. On Sunday, a source told Reuters that returning to full capacity in the wake of the attacks could take “weeks,” not days.
US Strategic Reserve Won’t Help Major Importers of Saudi Crude
However, US and Saudi assurances don’t seem to be enough for some analysts. Ravi Singh, a commodity market expert at Karvy, an India-based financial services company, told Sputnik that he wasn’t satisfied with Washington’s pledge, pointing to limited US export capacity to fill the gap to supply countries like China, India and Japan, which are the largest importers of Saudi oil.
Furthermore, both according to the Financial Times, Saudi Arabia’s crude storage facilities are estimated to have enough oil to continue exports at present levels for about 26 days. Bjornar Tonghaugen, the head of oil market research at Oslo-based energy research firm Rystad Energy, explained that these reserves will mean that although the “global flow of crude oil will not be disrupted immediately…the longer the [Saudi] processing facility remains disrupted, the larger the potential impact on actual crude flows will be.”
New Supply Dangers
Also important is the so-called “irreversible risk premium” that traders may come to associate with the attacks, with JP Morgan consultant Christian Malek and Gary Ross of Black Gold Investors recently telling Reuters that the attacks highlighted the vulnerability of Saudi Arabia’s oil infrastructure, with Ross explaining that markets will need to take account of the fact that attacks may prove “difficult to stop and could occur periodically” in the future.
On Monday, Gen. Yahya Sare’a, a spokesman for Yemen’s Houthi movement, warned Riyadh that the militants reserve the right to continue hitting infrastructure and military targets in Saudi Arabia “anywhere and anytime” until Riyadh ends its “aggression and blockade on Yemen.” However, the Saudi-led coalition in Yemen has shown no indication that it would be willing to end its effort to restore ousted Yemeni president Abdrabbuh Mansur Hadi to power.
Ultimately, Dr. Nafis Alam, an adjunct professor of finance at the department of business management at the Sepuluh Nopember Institute of Technology in Surabaya, Indonesia, and research affiliate with the Cambridge Centre for Alternative Finance, suggests short-term spikes and drops in oil prices are not the biggest risk to oil prices in the long term. The real “big issue,” he said, “is the political fallout of the attack where the US and the Kingdom of Saudi Arabia are putting the blame on Iran, which will further escalate” tensions and, in turn, may “further push the concern of future supplies.”