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Oil prices set to go up after drone attacks on Saudi oil facilities.

Summary: 5.7 million barrels a day of production halted leading to potential supply disruptions

Smoke is seen following a fire at an Aramco factory in Abqaiq Image Credit: Reuters

Abu Dhabi: Oil prices will see an increase in prices when oil markets open on Monday, following drone attacks on Saudi oil facilities in Abqaiq and Khurais, which cut oil production in the kingdom by 5.7 million barrels per day (bpd), said analysts.

Confirming the disruptions in its operations, Saudi Aramco said an update on the oil facilities would be provided in the next 48 hours. Saudi energy minister prince Abdulaziz Bin Salman said the cut in production would not affect supply to its customers with the country turning to its inventory stocks to compensate.

The latest attacks underscored yet again the geopolitical tensions in the Middle East, with US secretary of state Mike Pompeo directly accusing Iran of orchestrating the attacks on what he called the world's energy supply. Iran, for its part denied any role in the attacks, Iranian foreign minister Javad Zariff on Twitter said that Pompeo was engaging in mass deceit.

"Attacks on the Abqaiq processing facility and the Khurais oilfield in Saudi Arabia over the weekend present an enormous upside risk to oil prices as production shuts down while damage control and repairs are carried out," said Edward Bell, commodity analyst, Global Markets and Treasury, Emirates NBD. "How high oil prices move will depend on the extent of damage and how long any repair work will take but markets will now incorporate geopolitical risks into oil prices at a much higher level, adding support to spot prices for crude," he added.

"The update by Saudi Aramco will give us a better idea, if the damage is relatively minor then the impact on prices might dissipate. However, if the damage to the facilities are more substantial then the impact in terms of higher prices could be sustained," Bell said.

"Until we get a clearer picture of how damaging the attacks have been, and a timeline for repair, we are leaving our expectation for fourth quarter Brent average of $63 per barrel unchanged," he added.

Bell did also note that if prices were to reach as high as $80, that prices would eventually lower down due to the current weak demand sentiment in the oil market. "Were oil prices to spike back up to $70-$80 in response to the attacks, any fleeting marginal demand would dissipate and help prices normalise at a lower level," he said. "The immediate upside is coming at a time when the market does not need it," he added.

The US Department of Energy for its part said it was be ready to supply oil markets from its own stockpile reserves should there be any supply shortages, ensuring markets remain well balanced with stable prices.

"The oil market has limited options to replace the Saudi crude in the short term ... Spare capacity is overly concentrated in Saudi Arabia. Of Opec's total, almost 75 per cent is held in the kingdom with the next biggest share in the UAE [9.9 per cent]," said Bell.

"The UAE, Kuwait and Iraq could together raise output by close to 700,000 bpd to help accommodate markets but the increase falls well short of the drop in Saudi production," he added, highlighting the challenge of replacing Saudi oil in the markets.

The International Energy Agency in a statement said that they were in contact with Saudi authorities, and that oil markets are well supplied for now in response to the Saudi production cuts.

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Publication:Gulf News (United Arab Emirates)
Geographic Code:7SAUD
Date:Sep 15, 2019
Words:614
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