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Oil uncertainty goes beyond Saudi supply

Arthur Sullivan
September 17, 2019

It's been a turbulent few days on international markets for oil investors. Yet while Saudi Arabian supply may be restored quickly, the attacks have raised questions that may impact the price of oil in the longer term.

Raffinerie im Sonnenlicht
Image: Colourbox

The price of oil cooled in European trading on Tuesday, following the huge spike on Monday that came in the aftermath of the attacks on Saudi Arabia's oil infrastructure over the weekend.

The price for Brent crude, the international oil standard bearer, jumped by 20% to just under $72 (€64.50) a barrel on Monday — an increase of $12. That was one of the biggest one day jumps in history.

In early Tuesday trading it had fallen back to just under $69 per barrel but strong investor uncertainty remains after the drone attacks that knocked out 5.7 million barrels of daily crude production — about 50% of Saudi Arabia's output and over 5% of global production.

The attacks and the subsequent oil price surge has led to fears over the impact it could have on the longer term price of oil. Joseph Gatdula, head of oil and gas analysis at Fitch Solutions, told DW that until an official report on the extent of the damage is released by Saudi Arabia, the longer term impact on oil prices is difficult to assess. 

"The latest is that about 30% of production has come back but these are unsubstantiated reports. What we are really waiting for is an official report," he told DW.

Infografik extreme Preissteigerung Öl EN
The oil price spike on Monday was one of the biggest in history

"Until that report is released, we can't be sure what the timeline is. But the extent of the damage looks somewhat manageable."

However, as well as uncertainty over how great the ultimate impact on supply will be, more longstanding jitters over oil security generally in Saudi Arabia and the Middle East as a whole is also a source of concern for investors.

"This attack underscores the vulnerability of oil production facilities in the Middle East," renowned oil trader Andy Hall told the Financial Times. "It would seem the oil market needs to not only price in the current supply loss but also a higher risk premium for the future."

Influencing the price

The extent to which the attacks at the facilities in Abqaiq and Khurais will affect the price of energy for ordinary consumers and businesses around the world depends on several factors, an obvious one being exactly how much Saudi oil production is damaged and how long for.

That is still not known, although the Financial Times reported on Tuesday that several sources aware of the extent of the damage told the newspaper it would take several months before Saudi oil production was back at normal levels.

Other highly significant factors are how the US and Saudi governments respond. Iran has denied having any role in the attacks, which have been claimed by Yemeni rebels.

Saudi Arabia has not yet directly blamed Iran for the attacks while US President Donald Trump has also been cautious. He said his country's response will depend on the Saudi response.

Several analysts have said that the longer-term risk to oil prices is not a disruption to supply but rather what a military escalation in the region would do.

Jörg Kramer, chief economist at Commerzbank told DW that even a $7 increase in the price of oil would have a minimal impact on the German economy for example, compared with other global issues at the moment, such as the US-China trade conflict.

"I do not worry about a $7 increase in the oil price," he said. "I do worry about a potential risk of a military escalation."

Big in Japan

Although it is possible that Saudi supply will be restored to normal levelsin a relatively short space of a time, a prolonged disruption on its supply of oil would impact several countries, particularly in Asia.

Saudi Arabia is the world's biggest exporter of crude oil but its export market is heavily geared towards Asia, where Japan, China, India and South Korea are among its biggest customers (see graphic).

Infografik Saudi-Arabien Ölexporte 2017 EN

Some of those countries are more reliant on Saudi oil than others. For example, China imports around 13% of its crude oil from Saudi Arabia whereas Japan imports close to 40% of its oil from the Kingdom and close to 90% from the Middle East region as a whole.

However, several other political events have disrupted oil supply around the world in recent years, notably in Venezuela and Iran and it has not had a dramatic, sustained impact on the price of oil on the market.

OPEC, the organization of oil-producing nations which includes Saudi Arabia, has been more worried in recent months about oversupply rather than shortages. Indeed, it is Saudi Arabia that has taken on most of the cuts requested by the group.

Global oil stockpiles are also unusually high at the moment. Countries such as Norway and Brazil have been increasing production 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.

Such factors mean there is unlikely to be a global shortage of oil anytime soon, all else being equal.

Affairs of mice, men and oil remain uncertain

The attacks in Saudi Arabia though, show that all else might not remain equal.

The answer to most questions on the long-term price of oil ultimately hinge on security in the Middle East and the likelihood of further political tensions, attacks on infrastructure, some form of military activity or intervention — or all of the above.

The most pressing impact of the attacks on the price of oil therefore may not relate to the precise physical damage done.

Rather, it is that they provide an unwelcome glimpse of the vulnerability of Middle Eastern oil supplies, creating the very condition that investors and markets hate the most: uncertainty.