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Officials say ‘severe’ disruption will last weeks or months
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Aramco tells customers some October shipments to be delayed
The oil market is facing a prolonged disruption to Saudi Arabia’s oil
production with few options for replacing such huge output losses.
The
weekend attacks on the kingdom eliminated about 5% of global oil supply
-- and raised the risk of more conflict in the region -- propelling
Brent crude to a record surge on Monday. Officials at state oil company
Saudi Aramco have become less optimistic on the pace of output recovery,
telling a senior foreign diplomat they face a “severe” disruption
measured in weeks and months and informing some customers that October shipments will be delayed.
The historic price gain underscores the unprecedented nature
of the disruption caused by the drone attack on the Abqaiq crude
processing plant. For decades, Saudi Arabia has been the oil market’s
great stabilizer, maintaining a large cushion of spare production
capacity that can be tapped in emergencies, such as the 2011 war in
Libya.
The halt of 5.7 million barrels day of the kingdom’s
production -- the worst sudden supply loss in history -- exposes the
inadequacy of the rest of the world’s supply buffer.
“The market is in scramble mode to secure not only
supplies of crude, but also products,” consultant JBC Energy GmbH said
in a note. Prices are “reflecting a new geopolitical risk premium,
namely that the safety of oil production in the heart of the Middle East
cannot be guaranteed.”
Tehran and Riyadh are historic foes that have been backing
opposite sides in Yemen’s long-running civil war. The volatile situation
in the region finally boiled over earlier this year as U.S. President
Donald Trump used sanctions to attempt to choke off all of Iran’s oil
exports -- which are the lifeblood of its economy -- after he
unilaterally withdrew from an international nuclear deal.
Since
then the Persian Gulf, source of about a third of the world’s seaborne
oil exports, has been under siege -- targeted by air, sea and land.
While Trump has shown some reluctance to go to war, there are also few
prospects for easing tensions as Saudi Crown Prince Mohammed bin Salman
decides how to respond to the assault.
Houthi rebels in Yemen, who are backed by Tehran, said on
Monday that oil installations in Saudi Arabia will remain among their
targets and their weapons can reach anywhere in the country. Iran’s
supreme leader Ayatollah Ali Khamenei said on Tuesday that his country won’t negotiate with the U.S. on any level neither in New York or anywhere else.
Saudi
Aramco is firing up idle offshore oil fields to replace some of the
lost production, said a person familiar with the matter. Customers are
also being supplied using stockpiles, though some buyers are being asked
to accept different grades of crude. The kingdom has enough domestic
inventories to cover about 26 days of exports, according to consultant
Rystad Energy A/S.
Trump also authorized the release of oil from
the country’s Strategic Petroleum Reserve, while the International
Energy Agency, which helps coordinate industrialized countries’
emergency fuel stockpiles, said it was monitoring the situation.
According to Bloomberg calculations based on
publicly available data, the absolute maximum in spare capacity that
could be brought into production in the coming weeks is about 3.9
million barrels a day.
The true volume of viable backup supply could be
significantly lower, because it includes restarting production from the
Neutral Zone shared by Saudi Arabia and Kuwait, as well as tapping the
kingdom’s own spare capacity, much of which may also have to be
processed at the Abqaiq or Khurais facilities and therefore be unusable.
OPEC Capacity
Other
participants in the OPEC+ cuts, such as Russia, Kazakhstan and the
United Arab Emirates, could restore a few hundred-thousand barrels a day
of production, not enough to offset the Saudi losses.
The
Organization of Petroleum Exporting Countries is in regular contact with
the Saudi authorities, the group’s Secretary-General Mohammad Barkindo
said in a Bloomberg TV interview. It’s premature to talk about reversing
the oil-production cuts implemented by OPEC and its allies, he said.
U.S. output may be booming, but the country’s many shale
drillers hold little to no output in reserve. Oil production has
plateaued at an average level of 12.37 million barrels a day since
recovering from the impact of Hurricane Barry at the end of July.
Output will continue to grow and more than 10 new export terminals
have been proposed for U.S. crude, capable of handling about 8 million
barrels a day, but the first of these is unlikely to be operational
before 2022 at the earliest.
Crude prices pared gains on Tuesday,
following an extraordinary trading day in which Brent crude leaped
settled a record 15% higher at just above $69. Futures were 1.7% lower
at $67.87 a barrel as of 12:09 p.m. in London as the market waited for
any further update from Aramco.
Saudi Energy Minister Prince Abdulaziz bin Salman is scheduled to hold a press briefing on Tuesday evening in Jeddah.
Images
released of the damage to Abqaiq’s stabilization towers, which separate
gaseous compounds from crude oil, suggest lengthy repairs, according to
Phillip Cornell, a former senior corporate planning adviser to Aramco.
“They can take weeks or months to get specialized parts,” he
said at an event hosted by the Atlantic Council in Washington on Monday.
Five out of 18 stabilization towers appear to have been taken out and
the pictures that have been released show “very specific, accurate
targeting of those particular infrastructures,” he said.
In
addition to the immediate loss of supply, the attack raised the specter
of U.S. retaliation against Iran, which could further inflame oil
prices. While Houthi rebels in Yemen claimed responsibility for the
assault, President Trump said it looked like Iran was to blame.
“I don’t want to have war with anybody” but our military is prepared, Trump said at the White House on Monday.
— With assistance by Christopher Sell, Evan Sully, and Will Kennedy
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