Global oil experts explain 3 outcomes after Saudi field attacks

By Luke Geiver | September 17, 2019

Following the attacks on Abqaiq and Khurais in Saudia Arabia, the largest single disruption of oil production in history, the experts at global energy analysis firm IHS Markit have issued several plausible outcomes. The outcomes are based on a timeline linked to the time required to bring back online the production volumes impacted from the unplanned outages that recently took place and caused the price of Brent Crude to rise by roughly $10/b overnight.

According to IHS Markit, the potential impact can be thought of in three time dimensions:

  1. Limited (7 to 14 days)
  2. Extended but manageable (30 to 120 days)
  3. Structural (120+ days)

Daniel Yergin, vice chairman of IHS Markit, said that what was a risk scenario at one point has become a reality. “The amount of Saudi oil offline is equivalent to one-third of what passes everyday through the strait of Hormuz,” adding that two things will jangle the oil market in the coming days, “how long the recovery and what comes next.”

Under the limited timeframe scenario, oil flows in Abqaiq will be addressable and back online in two weeks. Such a scenario would lead to a gross disruption of roughly 30 to 60 MMbl. That amount could be managed by Saudi stocks and global commercial inventories. According to the IHS team, this remains a low-likelihood scenario due to the extent of the attack and the reality that a sustained level of damage will impact production levels.

Under the extended-but-manageable scenario, the gross disruption could take 150 to 300 MMbl of oil out of production for longer than four months. IHS said such a scenario would call for extraordinary measures around the globe to mitigate the physical shortfall caused by the disruption, including a coordinated Straetegic Petroleum Reserve release from the IEA, a potential call on China to ease market pressure through inventories and a call for an increase in production from within the Vienna Alliance. This scenario is most likely.

If the structural damage scenario becomes real, it is the worst-case scenario. “In this scenario,” IHS said, “prices spike and extraordinary measures like SPR releases would be needed but would insufficient and ultimately the market would require demand and eventually reactive supply such as the U.S. (via higher prices) to correct for the structural imbalance in the market.” However, according to IHS, given the high priority of the facility to Aramco and the company’s prioritization of repairs regardless of cost, a stacked return means that it is unlikely that a full shutdown endures beyond four months unless damage from the attacks is worse than thought, or, large-scale conflict breaks out.

“Under and scenario, the heightened risk premium marks a stunning reversal for the market,” Roger Diwan, vice president at IHS Markit said. “The combination of weak demand fed by macroeconomic fears and the potential for a U.S.-Iran détente unlocking significant volumes of oil currently under sanction had weighted on the market. Now an enduring increase in the market’s risk premium is justified.”