Saudi Arabia has sufficient stocks to meet shortages for three months, analysts say

Crude prices surged above 19 per cent during the early hours of trading on Monday as markets priced in geopolitical risk premium

In case of an outage, the most efficient way to meet the supply gap would be through the release of OECD inventories, analysts said. Reuters 

Saudi Arabia has sufficient crude stockpiles to meet shortages for over three months, if needed, analysts say, as the world's largest oil exporter sees an uphill task to bring more than half of its output back online.

On Saturday, multiple drone attacks halted production of 5.7 million barrels per day (bpd), or more than half of Saudi Arabia's output, with the kingdom drawing on its crude stocks to meet export as well as petrochemical feed stock requirements of its large downstream facilities.

The attacks hit at the heart of Saudi Arabia's energy hub in the Eastern Province targeting a 7 million bpd capacity oil stabilisation plant, the largest in the world, which "sweetens" crude from the volatile hydrogen sulfide, thereby making it safer for transport. The facility processes an equivalent of 7 per cent of total global crude output. The Khurais field, about 200 kilometres southwest, had a production capacity of 1.2 million bpd until it was attacked. The attacks also took half of the kingdom's gas production offline.

The attacks, the most debilitating targeting of the Saudi energy infrastructure to date, have brought geopolitical risk premium back into. Crude shot up over 19 per cent in the early trading hours with Brent gaining $71.95 at one point before settling down to $66.45 per barrel at 5.23pm UAE time. The damaged Aramco facilities could take weeks to repair, raising concerns in the markets about how Saudi Arabia can sustain its level of exports while at half capacity.

Saudi Arabia, which accounts for 10 per cent of global output, maintains an inventory level of at least 187 million barrels per day, sufficient to cover around 28 days worth of exports.

With Saudi Arabia still producing under half of its capacity, exports could be sustained for longer than 4 weeks, said Giovanni Staunovo, a commodity analyst at UBS.

However, others such as Amit Bhandari of Mumbai-based thinktank Gateway House expect the kingdom to have reserves to cover for a longer dry spell.

"It is expected that some production [could] start from Abqaiq in the short term as such facilities are typically built with some redundancy. So, in the worst case, the stockpile will be available for up to 3 months," he said.

Saudi Arabia's outage comes at a time when the oil markets are well-supplied and the kingdom, along with its fellow producers in Opec and sovereign producers outside the group led by Russia, has been drawing down 1.2 million bpd to push back on high inventory levels.

In case of an outage, the most efficient way to meet the supply gap would be through the release of OECD inventories, including the US' commercial and strategic stocks, said Vandana Hari, founder and chief executive of Singapore-based Vanda Insights.

"It seems that Saudi Arabia wants to draw down its own reserves first. That works better for their credibility as a relatively dependable supplier, and for the export income while crude prices are elevated," she added.

The US has also said it would step in. On Monday morning, US President Donald Trump tweeted that he was sanctioning opening up the country's strategic petroleum reserves, which are a collective 645 million barrels of which two-thirds are commercial stocks. However, there could be "capacity constraints" on the volume of crude that could leave the storage caverns on a daily basis, cautioned Mr Staunovo.

Meanwhile, it is still early for customers such as India to worry about security of supply and higher prices. Indian refiners typically keep around 20 days worth of crude storage, with another 20-days worth of product supply. There's also 7 days' worth of floating storage, equivalent to the time taken for hydrocarbons shipments to sail from the Gulf to India for instance, said Mr Bhandari.