Thu, 17 Oct 2019

Saudi Arabia is racing to restore oil production after a brazen drone strike on a key Aramco facility slashed its output by half, removing about 5% of world supply.

The assault, claimed by rebels in Yemen but blamed on Iran by the US, shows the very heart of the Saudi economy is vulnerable to escalating tensions in the region. It's an indication of how Crown Prince Mohammed bin Salman's aggressive foreign policy could come to threaten his push for economic modernisation.

Aramco can restart a significant volume of the halted oil production within days, but needs weeks to restore full output capacity, said people familiar with the matter. The company could consider declaring itself unable to fulfill contracts on some international shipments - know as - if the resumption of full capacity at Abqaiq takes weeks, they said.

That would rattle oil markets and cast a shadow on Aramco's preparations for what could be the world's biggest initial public offering. It's also set to escalate a showdown pitting Saudi Arabia and the US against Iran, which backs proxy groups from Yemen to Syria and Lebanon.

If the disruption is "protracted it could be a big challenge for the oil markets," Mele Kyari, chief executive officer of state producer Nigerian National Petroleum Corporation, told Bloomberg Television on Sunday.

The attack is the biggest on Saudi Arabia's oil infrastructure since Iraq's Saddam Hussein fired Scud missiles into the kingdom during the first Gulf War. The kingdom's benchmark stock index tumbled as much as 3.1% on Sunday in Riyadh.

The Houthis, who are fighting Saudi-backed forces in Yemen, have claimed responsibility for most of the strikes against Aramco installations.

Instead of supplying some customers with the usual crude oil grades of Arab Light or Arab Extra Light, the company may offer them Arab Heavy and Arab Medium as a replacement, according to a person familiar with the matter.

While that field wasn't attacked, its crude and gas is sent to Abqaiq for processing. The smoke most likely indicated flaring, the industry term for what happens when a facility stops suddenly and excess oil and natural gas is safely burned off.

For the global oil market, the 5.7 million barrels a day Saudi halt is the single worst sudden disruption ever, surpassing the loss of Kuwaiti and Iraqi petroleum supply in August 1990, when Saddam Hussein invaded his neighbour. It also exceeds the loss of Iranian oil output in 1979 during the Islamic Revolution, according to data from the US Department of Energy.

Government Action

The US government said it's prepared to dip into the Strategic Petroleum Reserve if necessary to offset any market disruption. The International Energy Agency, which helps coordinate industrialised countries' emergency fuel stockpiles, said it was monitoring the situation.

The key question for governments, oil traders and the Organization of Petroleum Exporting Countries, in which Saudi Arabia is the largest producer, is how long the disruption lasts."The global economy can ill afford higher oil prices at a time of economic slowdown," Ole Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen, said by email.

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