Over the weekend, drones attacked  the world’s most important crude processing facility at Abquaiq and the nearby oil field Khuras, on Saturday morning. Brent crude futures jumped to as high as $ 71 / bbl before retracing to around $ 66 /bbl at the time of writing.

In the midst of all the uncertainty prevailing in the region, we attempt to examine what is at stake, what are the most crucial short term and long term impacts of this action. 

What is at stake?

The facility at Abquaiq comprises about 5.7 mbpd of Saudi’s crude processing facility. Of this, around 1.5 mb/d processes Arab Light Crude, arguably the most important of the Saudi bouquet.

It is a well known fact that such attacks rarely cause long term damage to production facilities. Saudi Aramco says it expects to restore around a third of this capacity by the end of today.  It is not unreasonable to expect the rest to come onstream by the end of the week (more details will soon be available, we hope).

The issues therefore are

  • How will it impact crude supply in the immediate future?

    Saudi has promised that it would make good on its supply contracts through its reserves (which would have burgeoned post the export cuts). Therefore, the immediate possibility of shortage is low. While they have said that the grade of crude could vary, we can only surmise that Saudi will supply heavier grades to some buyers to make good their supply commitments.

    We expect everybody to be happy with this arrangement. Most refiners with secondary processing units would welcome the availability of heavier crude from November.

    The US too has offered to make crude available from its SPR to calm down supply worries.

  • What is the medium term impact?

    As we mentioned, we expect the production to come back on stream sooner rather than later. Hence, we do not see supply disruption for a seriously long period of time.

  • What is the long term impact?

    The political uncertainty lends some sort of floor to the price of Crude Oil. We have been remarking over the past several months that whenever Brent prices have dipped below $ 60 /bbl, some news or the other like this has always surfaced, whether it is Britain seizing an Irani tanker, Iran seizing a British tanker, US drone being shot down and now this. All these events have been known to happen just ‘coincidentally’?

    On the other hand, sustained prices at high level could could impact consumption growth. As could higher prices. And that may well be the direction that the US is keen on avoiding direct conflict with IRA as it would be next to impossible to send the toothpaste back into the tube.

    All the noises being made by Mike Pompeo and Irani officials just help prop up oil prices, a scenario bound to be acceptable to all the dramatis personae.

We hope you find our thought process of interest. Please email us at sukrit@trifectaconsultants.net  for further clarifications, if any.

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