Oil could rise $10 per barrel after attacks on Saudi Aramco facilities, analysts say

The magnitude of the production outage and uncertainty over its duration could raise prices over supply concerns

Saudi Aramco is the world’s largest integrated oil and gas company . Reuters

The drone attacks on Saudi Aramco's facilities on Saturday that knocked out more than half the kingdom's oil output is expected to have a dramatic
effect on oil prices due to supply concerns.

Brent closed down 0.2 per cent at $60.22 per barrel on Friday, while US crude West Texas Intermediate dropped 0.4 per cent at $54.85 per barrel.

Both Brent and WTI traded lower due to concerns about weakening demand as a result of the ongoing trade dispute between the US and China, the world's two biggest economies.

"Given the magnitude of the production outage and uncertainty over its duration, we expect a major spike in crude prices when markets open on Monday," said Vandana Hari, founder and chief executive of Vanda Insights, a provider of oil markets macroanalysis.

“Brent and WTI futures, which settled close to three-week lows on Friday, could rocket by up to $10 per barrel in a knee-jerk reaction, though the sustainability of the rally will hinge on an assessment of the magnitude and duration of the supply shortfall, taking into account the mitigating measures,” she said.

Eurasia Group echoed that statement. The risk consultancy said oil prices could rise by "$10 if the damage to Aramco's facilities is significant".

In similar comments, Bjornar Tonhaugen, head of oil market analysis at Norway’s Rystad Energy said: “The immediate impact on crude prices could be around $10 per barrel and we expect the impact could be around $5 for weeks.”

On Saturday morning, two of Aramco's facilities at Abqaiq and Khurais were attacked by drones. Houthi rebels in Yemen claimed responsibility. The US blamed Iran. Aramco chief executive Amin Nasser said there were no injuries, but the company said it had suspended production of 5.7 million barrels of crude oil per day.

"Work is under way to restore production and a progress update will be provided in around 48 hours," Mr Nasser said.

The Abqaiq facility, which is close to Aramco's Dhahran headquarters, has the capacity to process 7 million bpd of crude, which is equivalent to
8 per cent of global production. Khurais, on the other hand, serves the Saudi Arabia's second largest oilfield. Aramco did not comment on the extent to which its facilities have been damaged, but the kingdom has spare capacity.

Prior to the attacks, the country had the ability to produce 12 million bpd but had cut production to a little more than 9.8 million bpd last month as part of its agreement with Opec+.

“We should see market participants adding a significant risk premium to oil prices on Monday,” said Giovanni Staunovo, commodity analyst at UBS. The size of a risk premium will depend on the scale of damage and the impact on exports, he added.

"Spare capacity is limited and primarily in the hands of the Saudis. The attack will remind market participants that large disruptions in Saudi Arabia mean the reaction function of Opec to cover any supply disruptions is restricted," he said.

Meanwhile, analysts do not expect the US to release supplies held in its Strategic Petroleum Reserve in response to the temporary shutdown.

"At present, Saudi oil sales to the US are at a historic low. It will be easy for any refineries to replace this small amount of Saudi oil without releasing oil from the SPR," said Ellen Wald, president of Transversal Consulting and senior fellow at the Atlantic Council's Global Energy centre.

The development comes as Aramco prepares to float shares as early as this year as part of efforts to diversify Saudi economy away from oil. Aramco's valuation could be affected due to the attacks but they are unlikely to derail the plans to sell shares, said Eurasia.

In separate announcements yesterday on the Saudi stock market, Tadawul, petrochemical companies Sabic, Saudi Kayan and Yanbu National Petrochemicals (Yansab) announced that their feedstocks had been curtailed.

Yansab said feedstocks were curtailed by 30 per cent, Saudi Kayan by 50 per cent and Sabic 49 per cent, the statement said.
Saudi stocks were trading lower yesterday, with the Tadawul All Share Index closing down 1.1 per cent. Shares in Sabic, Yansab and Saudi Kayan were down 2.5 per cent, 1.1 per cent and 2.6 per cent, respectively.

The International Energy Agency said on Twitter on Saturday it was closely monitoring the situation and was in contact with Saudi authorities, as well as other major producer and consumer nations.

"For now, markets are well supplied with ample commercial supplies," the IEA said.