Oil prices spiked on Monday, two days after the largest oil disruption in history took place.
Saudi Arabia lost 5.7 million barrels per day (mb/d) of production after the Abqaiq facility was attacked on Saturday, shuttering more than half of the country’s oil production. The disruption is larger than was lost during the Iranian Revolution in 1979, Iraq’s invasion of Kuwait in 1990, and even during the Arab Oil Embargo in 1973, as Bloomberg notes. Brent briefly surged by more than $11 per barrel at one point during intraday trading on Monday, the largest increase in the benchmark’s history dating back to 1988.
Early accounts indicate that Saturday’s attack may have come from a group of drones, while other analysts believe it was carried out by cruise missiles. It’s also possible there was a combination of both.
Abqaiq is a critical oil processing facility in Saudi Arabia, a chokepoint that has no easy workaround. The facility does not make press headlines, but oil experts have long been aware of its critical importance – and vulnerability.
“For the oil market if not global economy, Abqaiq is the single most valuable piece of real estate in planet earth. A successful attack on Abqaiq would be akin to a massive heart attack for the oil market and global economy,” Bob McNally of the Rapidan Energy Group said in a statement.
“It’s the mother ship of the Saudi energy system,” Helima Croft, global head of commodity strategy at RBC Capital Markets, according to the Wall Street Journal. “This is probably the worst infrastructure attack we’ve seen in the kingdom.”
The facility processes 7 mb/d of crude oil, more than half of total oil production in Saudi Arabia. It removes sulfur and gas and other impurities from the oil, making it safe for transport via pipeline. It has long been high up on the list of potential targets that would send shockwaves through the oil market. In 2006, Al Qaeda led an unsuccessful attack on Abqaiq, but oil prices jumped by $3 per barrel anyway.
Presciently, Rapidan Energy explored the potential oil market impacts of a U.S.-Iran conflict in a report just last month. Abqaiq loomed large in the analysis. “Were Abqaiq’s stabilization towers and/or spheroids to be damaged, they could take many months to repair because they are large, uniquely designed, and remote,” Rapidan Energy said in its report. “Obtaining specialized repair parts and services would take time. Meanwhile, the world would lose 5.0 mb/d, or roughly 6%, of crude production (excluding NGLs), and nearly all its spare capacity.”
A disruption in the Strait of Hormuz is often the source of agony for analysts trying to game out conflict in the Middle East, but Abqaiq is potentially more significant. Any disruption in the Strait of Hormuz, in theory, could be cleared by the U.S. Navy in short order. Some dispute that thinking, but there is some degree of confidence that the American military would respond quickly to a disruption in the Persian Gulf.
The same is not true for Abqaiq, and for oil markets the big question is how long Abqaiq will see operational disruptions. Extensive damage to a unique facility with unique equipment will take weeks or months to repair, analysts say. Even when Abqaiq returns to full operations, Rapidan said the market could keep a $10-per-barrel risk premium on the price of oil because of the shattered perception of the safety of supply.
Immediately after the attack, Saudi Arabia suggested that operations could resume as soon as Monday. “We should be able to have 2 million barrels a day back online…by tomorrow,” a person familiar with the matter told the Wall Street Journal on Sunday. But as the weekend wore on, a quick turnaround looked increasingly unlikely.
An extended outage would drive up prices substantially. The oil market has gone from oversupplied to under-supplied overnight. “The Kingdom has enough domestic crude oil inventories to cover its production suspension of 5.7 (million barrels a day) for almost 30 days,” Sara Vakhshouri, president of SVB Energy International, told the Wall Street Journal.
“This could take a longer time than the authorities initially are claiming. Despite lower exports this year, Saudi Arabia has also depleted its crude oil stocks to the lowest levels in 10 years, so the country alone does not have the same robustness to Middle East interruptions as it used to have,” Per Magnus Nysveen, head of analysis at Rystad Energy, said in a statement.
Saudi Arabia spoke with OPEC allies and refrained from asking for more production. Riyadh has been trying to get some OPEC members to rein in overproduction, so they may not see an immediate need for more supply. Russia’s energy minister also said that ample inventories can cover for the outage.
“We have spare capacity. There are volumes we can deal with as an instant reaction,” the energy minister of the United Arab Emirates, Suhail al-Mazrouei, told reporters in Abu Dhabi.
Beyond the immediate disruption, an even bigger question centers on how the Saudi and American governments will react.
The Houthis in Yemen claimed responsibility, and said that Saudi oil facilities will continue to be top targets. But the U.S. government believes Iran was behind the attack. The U.S. released satellite imagery of the Abqaiq facility, identifying 17 points of impact. Washington said that the attack likely came from the north or northwest, which would mean that it did not come from Yemen where the Houthis are located.
If it came from the north, that would leave Iraq, Iran or the Persian Gulf as the source of the attack. Iraq’s prime minister dismissed the notion that Iranian-backed groups attacked from Iraqi territory. For its part, Iran denied involvement entirely, although many analysts note that Iran’s strategy to push back against the U.S. maximum pressure campaign has consistently relied on attacks through proxy groups, allowing Tehran the ability to deny responsibility.
Still, confusing matters a bit, the New York Times reports that the satellite imagery revealed some damage to western side of the Abqaiq facility, which undercuts the case that the attack definitively came from the north.
President Trump said he authorized the release of oil from the U.S. strategic petroleum reserve (SPR) in the event that supply is needed, which was credited with easing oil prices a bit on Monday. “We don’t need Middle Eastern Oil & Gas, & in fact have very few tankers there, but will help our Allies!” Trump said on Twitter.
Trump said that the U.S. was “locked and loaded” to strike back. The nightmare scenario is that the response to the Abqaiq attack leads to a broader regional war. In the immediate aftermath, Saudi officials used words like “terrorist” and refrained from calling out Iran, an indication that Riyadh is hesitant to engage in a country-on-country conflict. That points to proxy attacks or targeted and narrow attacks on Iranian assets as the logical response, analysts say.
Even in a best-case scenario in which the military response does not set off a regional war, and Abqaiq comes back online, the perception of heightened risk will linger.
“No matter whether it takes Saudi Arabia 5 days or a lot longer to get oil back into production, there is but one rational takeaway from this weekend’s drone attacks on the Kingdom’s infrastructure – that infrastructure is highly vulnerable to attack,” according to analysts at Citi.
At the same time, others pointed out that even as Abqaiq long loomed as one of the worst-case scenarios, Brent is still trading below $70 per barrel, even after the price spike on Monday. The market is at such a weak point that after the largest disruption in history, Brent is still substantially lower than 2018 highs.
“There’s nothing that better illustrates the twin effects of U.S. supply…and also the weak demand environment in which we find ourselves” Kevin Book, managing director at Clearview Energy Partners, told CNBC.