The attacks on Saudi Arabia’s most important oil facility have exposed the soft underbelly of the global energy market, knocking out more than 5 per cent of global crude production and denting the kingdom’s reputation as the most reliable supplier of last resort.
The immediate questions are just how long it will take Saudi Arabia to return to full capacity after the attacks and whether it can push its energy system hard enough in the meantime to make up most of the 5.7m barrels a day of lost supplies.
Initial assessments are that it could take weeks to get back to full strength. Oil prices are expected to jump when markets reopen on Sunday night, even if the kingdom can tap into oil held in storage or ramp up spare production capacity.
But the bigger issue for oil traders and the wider economy is whether Saudi Arabia’s image of invincibility has been shattered by the attack on the Abqaiq facility, which processes almost 70 per cent of crude output in the world’s largest oil exporter. It follows a string of other assaults on the kingdom’s energy infrastructure but is the most significant in almost 30 years.
Rystad Energy, a consultancy, said the attacks had “turned the market on its head over the weekend”, threatening to alter the perception of plentiful oil supplies ushered in by the US shale boom five years ago, which lowered oil prices across the globe. “The situation in the Middle East just got more fragile,” Rystad concluded.
The US has blamed Iran for the attacks and suggested they may not have originated in Yemen, where they were first claimed by Iranian-backed Houthi militias. Some US officials are reported to have questioned whether they were carried out by drones, as claimed, or via missiles launched from a neighbouring country in the early hours of Saturday morning.
Iran has denied involvement.
Regardless of their origin, oil traders say they must now assume that Saudi Arabia’s enemies in the region are capable of striking deep inside the kingdom, targeting its infrastructure and oilfields. That risks upending ita reputation as a reliable producer and supplier of crude, which it has spent decades cultivating.
While it is difficult to predict if there will be further attacks, or how Saudi Arabia or the US may respond to Saturday’s incident, analysts are already arguing that the threats to production from the region are now at the highest level since the first Gulf war in 1990/1.
Amy Myers Jaffe, energy fellow at the Council on Foreign Relations, said Iran appeared to be sending a clear message that it had the ability to directly target the most well-protected and critical infrastructure in the Middle East.
“What Iran is saying is: You can’t stop me. This is Clint Eastwood diplomacy: ‘Go ahead, make my day’. We have the capability to take out the facilities that are vital for the production and export of crude oil, even in the most sensitive of places,” Ms Myers Jaffe said.
S&P Global Platts Analytics, consulting arm of the energy price reporting agency, said it expected oil prices to jump to the “high 70s” per barrel in the coming days, an increase of more than a quarter. Brent crude closed at just above $60 on Friday.
The International Energy Agency and the US Department of Energy have both said they are monitoring the situation — and could use government stockpiles in an emergency.
“For the market, this incident is a very uncomfortable wake-up call to radically higher risk premiums on Gulf production,” said Samuel Ciszuk at ELS Analysis.
Saudi Arabia might benefit to a degree from a higher oil price, which would help dampen the blow of lost production for the kingdom. But it is unlikely to want to see prices spike because it fears the long-term impact on oil demand, especially at a time when electric vehicles and more efficient cars are already bringing crude’s future into question.
The stakes are especially high for the kingdom now that it is accelerating plans for the initial public offering of Saudi Aramco, a move central to its ambitious economic reform programme. The security of Saudi oil supplies will be central to how investors value the company.
The new oil minister, Prince Abdulaziz bin Salman, appointed a week ago by his half-brother and de facto ruler Crown Prince Mohammed bin Salman, may now find himself needing to turn to allies within Opec for help.
Saudi Arabia has long been the most powerful member in the cartel, holding the most spare production capacity in reserve. But it may now need to ask other members to raise output temporarily to help calm markets, marking a significant reversal of its current policy of reducing production in alliance with producers such as Russia to try and boost the price.
“The danger was always there,” Ms Myers Jaffe said. “But what we’ve just seen is not an oil pipeline being bombed or a tanker that is easily repaired or replaced. This is the oil industry’s jugular.”