The attacks on Saudi Arabia's oil production facilities could mean that a large chunk of its oil exports are sidelined for weeks. But the price spike that has followed may not last, as global demand has changed.
The drone attacks that hit Saudi Arabia's oil production facilities in Abqaiq and Khurais this weekend knocked out 5.7 million barrels of daily crude production. That is about 50% of the country's output and over 5% of global production. Oil futures prices jumped almost 20% on the news as markets opened on Monday in Asia, while shares in oil companies also spiked.
Brent spiked 19% to $71.95 (€64.50) a barrel, while US crude jumped 15% to a session-high of $63.34 a barrel. Brent futures rose 9.96% to $66.22 per barrel and US crude futures jumped 8.93% to $59.75 a barrel.
But analysts said a severe shock to energy markets and the world economy is unlikely.
"We've probably seen the best of the oil price rise today," David Lennox, resources analyst at Fat Prophets, told CNBC on Monday. "We really can't see any real significant change in the longer-term oil price because of this," he added. "We do believe that ... they will start to actually repair that facility fairly quickly."
OPEC has in fact been more worried in recent months about oversupply rather than shortages.The oil producers organization, along with Russia and other producers last week even called for tighter application of ongoing production cuts aimed at propping up prices. Saudi Arabia has taken on most of the cuts, producing less than 10 million barrels per day of crude, way below its OPEC production target.
Daniela Corsini, an economist at Intesa Sanpaolo in Milan, told DW: "After weeks of concerns about the expected weakness in global crude demand, now security of supplies is the main focus. For the first time the market is starting to price the vulnerability of Saudi infrastructure to attacks, while Saudi Arabia used to be perceived as one of the most reliable suppliers.
"Geopolitical risk premiums sharply rose. I expect that over the next days, crude prices will trade close to an average level of $65 for Brent and $60 for WTI. In fact, the market remains well supplied as Saudi Arabia could deplete its inventories to compensate for the lower output, while both the US and the IEA could release their strategic reserves in the event of extreme market tightness.
"Over the next quarters, volatility will remain a predominant market feature. I still expect that crude oil prices could trade most of the time in the upper part of a range between $55-$75."
Where do Saudi exports go?
The top export destinations of Saudi Arabia are China ($29.1 billion, €25.4 billion), Japan ($25 billion), India ($19.4 billion), South Korea ($17.7 billion) and the US ($17.3 billion).
How long to repair?
If they are fixed quickly, Eurasia Group estimates that oil prices may rise only $2 to $3 a barrel, leaving Brent below $65 a barrel. A more long-lasting disruption could mean an increase of $10 a barrel, the group said. Saudi Aramco said on Sunday that repairs were already underway.
Such an attack a few years ago might have sent oil prices rocketing, but the US today produces about 12.1 million barrels a day, double what it did in 2012 and 1.4 million barrels more than only a year ago. The US imports only about 630,000 barrels of Saudi oil a day, down about half from 2017. US oil facilities have also been spared from the hurricane season, while a slowing global economy has moderated demand.
Global oil stockpiles are also higher than usual and many producing countries have spare capacity. Other oil-producing countries are also increasing production, including Norway and Brazil, while Iraq, Nigeria and Russia have been producing a total of 650,000 barrels of oil above the levels agreed to with their OPEC partners.
The US and other developed countries have nearly 3 billion barrels in stockpiles, according to the International Energy Agency, about two months of demand.
Saudi Arabia has roughly 27 days of supply stockpiled, according to S&P Global Platts, a provider of energy information. That stockpile is stored not only in the kingdom but also in Egypt, Japan and the Netherlands for added security.
But it all depends
"The events in Saudi Arabia have ratcheted up tensions in the Middle East to a new level raising concerns about supply security,"Chris Midgley, global head of analytics at S&P Global Platts said. "The sudden change in geopolitical risk could cause crude prices to jump between $5 and $10 a barrel," Midgley said.