Page 4 - FSUOGM Week 37 2019

FSUOGM COMMENTARY FSUOGM
Market reels as Aramco facilities come under fire
A major attack on Saudi oil facilities has cut production by 5.7mn bpd, but the full effect will not be felt until existing reserves dry up.
SAUDI ARABIA
WHAT:
Drones and/or missiles blew up oil processing facilities at Abqaiq, the largest such plant in the world.
WHY:
While the culprit has yet to be formally identified, the US has officially blamed Iran, and contradictory reports are circling about the source of the strike.
WHAT NEXT:
Consumers are now waiting for Aramco to announce how long the damage will take to repair, with eyes on futures contracts.
THIS weekend’s attack on oil facilities at Abqaiq and Khurais took 5.7mn barrels per day of oil and 700,000 bpd of natural gas liquids (NGLs) out of production, leading to the biggest ever jump in oil price in a single day.
The strike was allegedly carried out by Irani- an-backed Houthi forces based in Yemen, using either 10 projectile-carrying drones or a combi- nation of drones and missiles.
Responsibility
At the start of the week, reports emerged sug- gesting that the assault had been launched from Hashd al-Shaabi bases in southern Iraq, with both Baghdad and the Houthis making public statements opposing the theory.
Late that evening, though, NBC News quoted three sources as saying that the US has intelli- gence that shows that the attack originated from Iran, with a congressional source saying: “This attack had a level of sophistication we have not seen before ... You will not see Democrats push- ing back on the idea that Iran was behind it.”
The route to the targets from Yemen would have involved flying over 700km of Saudi terri- tory, while the route from Iran is significantly less at 500-600km.
Speaking to Middle East Oil & Gas (MEOG), sources in both Iran and Saudi Arabia said that the countries were keen to ensure a climb-down from the escalating tensions between the pair, noting, though, that this might be complicated by the unpredictability of US President Donald Trump.
Capacity and resumption
While efforts to meet demand are unlikely to suffer from tighter supply for the next few weeks thanks to reserves previously stockpiled by Saudi Aramco, the longer-term view is somewhat less assured, with the firm seeking to restore production.
Oslo-based Rystad Energy estimates that Aramco holds around 26 days worth of crude exports in reserves around the kingdom, while CNBC quoted a Saudi source as saying that Ara- mco had 35-40 days of supply to meet contrac- tual obligations. Members of the International Energy Agency (IEA) have reserves to cover 90 days worth of imports. Both of these are likely
to be drained down by the latest attack, while Trump has said that the Strategic Petroleum Reserve (SPR) could be tapped to ensure there is no supply shortfall, with Asian governments following suit.
Meanwhile, reports that Aramco could restore 2mn bpd on September 16 will finally put its claims about its spare capacity to the test.
The company has long maintained that it holds2mnbpdofspareproductioncapacity,and it has carried out various large projects to bol- ster this. However, independent investigations have cast doubt, with these estimating that spare capacity could range from 500,000 bpd-1.6mn bpd.
There is also the Partitioned Neutral Zone (PNZ), shared with Kuwait, which has capacity to produce 550,000 bpd. It was shut in because of disagreements between the two governments in 2014 and then in 2015. The pair have been in discussions about the resumption of opera- tions there for months now and Saudi’s drop in output could provide the impetus to finalise an agreement.
Whatever spare capacity there is will be used to cushion the blow, but the location of the source of that output will determine how it can be utilised by Aramco.
Reaction
The reaction was unsurprising, with markets jerking upwards in early trades and closing up 14.7% on the day. However, with enough oil already produced to cover demand the attack is only likely to affect physical trades in a month’s time if it is not dealt with quickly.
Aramco’s key customers in Asia are watching keenly, with S&P Platts quoting an Asian refin- ing source as saying: “Everyone is waiting for Saudi to speak on how long they will need to fix it.” It is likely that the impact on supply, and thus pricing, will not begin to tell for over a month and mainly shipments of Arab Light and Arab Extra Light [will be] impacted.”
A comment by Aramco CEO Amin Nasser was published on the company’s website on Sep- tember 14, saying that work was “underway to restore production and a progress update will be provided in around 48 hours”, though this had not been released at the time of going to press.
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w w w . N E W S B A S E . c o m Week 37 18•September•2019