Strikes on Saudi facility will not have major impact on prices - analysis

Asian countries to feel strongest financial blow from attacks; exporter Russia stands to gain

By TARA KAVALER/THE MEDIA LINE
September 21, 2019 09:04
A satellite image showing damage to oil/gas Saudi Aramco infrastructure at Khurais, in Saudi Arabia

A satellite image showing damage to oil/gas Saudi Aramco infrastructure at Khurais, in Saudi Arabia in this handout picture released by the U.S Government September 15, 2019. (photo credit: U.S. GOVERNMENT/REUTERS)

The drone strikes on Saudi oil facilities last Saturday caused the global price of oil to go up nearly 15 percent earlier this week, but experts say the worst is behind us.

Saudi Arabia’s oil output was temporarily cut by more than 50 percent, or 5.7 million barrels per day (mb/d), according to the state-owned petroleum and natural gas company Saudi Aramco.

The Houthi rebels in Yemen claimed responsibility for the attack on two massive facilities, while the US government alleges Iran is responsible for the hit that lowered the global supply of oil by 5%.

However, the House of Saud and its subjects will not feel the financial impact. There are also indications that if oil production is down only short-term, there will be minimal effect on the cost of gasoline in the West, especially in America, despite media reports stating otherwise. Asian countries, particularly China, will disproportionately feel the impact of the drone attacks, and Russia has the most to financially gain.

According to George Dix, an oil analyst at the London office of Energy Aspects, an international energy research consultancy, the 5.7 mb/d shortfall has already been improved to 3.2 mb/day, and he expects Aramco to plug the gap this week.

“We believe an optimistic scenario is that by end of September, Saudi Aramco could have restored over 4.5 mb/d of lost production, with the remaining 1.0–1.2 mb/d returning by end of November. This still represents a significant loss of oil supply that will provide support to oil prices,” Dix told The Media Line.

Dix said there had been no shortage in electricity in Saudi Arabia, and gaps in oil production were most likely to be made up by Riyadh buying foreign oil because of the damage to its refining capacity, and exporting less. The kingdom was already in the process of raising the price of gasoline before the attacks by lowering state subsidies. The most recent price hike took place in the third quarter of 2019, and this is expected to continue as planned.

“We do not expect any changes to the pace of gasoline price increases as a result of the attacks,” Dix told The Media Line.

Nassim Shirkhani, the Middle East correspondent for Upstream, an international oil and gas news agency, agrees. “There will be no price increases for customers in Saudi Arabia, because this is a country that provides a cradle-to-grave social welfare system and the Saudis are not going to pass on any price increases to their citizens,” he told The Media Line.

Natural gas is likely to be the most affected by the drone attacks on Saudi Arabia if the shortage is of long duration, because the kingdom does not have the same kind of reserves in natural gas, or non-fossil fuel energy, as it does for oil.

Dr. Kristian Coates Ulrichsen, a fellow for the Middle East at Rice University’s Baker Institute for Public Policy, told The Media Line: “Production of gas was also hit by the attack, and this is the fuel that the Saudis have been hoping to use more of in domestic energy production to take the strain off oil, so if any disruption to gas supplies is prolonged, this will cause problems, because there are no other ready sources of alternative energy.”

However, Aneeka Gupta, the London-based associate director of research for WisdomTree Investments, an exchange-traded fund and exchange-traded product sponsor and asset manager, did not agree that the impact on prices would be minimal or that production would be down only short-term.

“Initially Saudi Arabia said they will get back production up and running in a matter of weeks, but some reports say that the outage could last until the end of the year. If that happens, then we could see [higher prices for an extended period],” Gupta told The Media Line.

Gupta also believes that the attack will not have long-term implications for the US gasoline market. Earlier this week, gas prices soared but then went back down.

“We have seen a knee-jerk reaction in gas prices [in the US], but…, while the US isn’t entirely independent from the standpoint of its energy exports, it is very close [to being so],” Gupta said. “I don’t think it will have a very big impact for the US, [as it is] fairly insulated [from events overseas].”

Upstream’s Shirkhani contended that Asian countries such as China and Japan would be hurt the most financially by the shortage. “The Asian importers are going to feel it because they are the most dependent on oil and gas in the Middle East due to their proximity and, traditionally, they have refineries that have been designed to process oil and gas from [this region],” he said.

Shirkhani argued that Asian insurance companies covering ships carrying oil from the Persian Gulf were the main beneficiaries of the drone attacks, as they would now charge higher premiums, which importers would then pass on to consumers. This might, he contended, push Asian countries to invest more in oil sources outside the Middle East.

“Maybe [Asian nations] will now try to slowly shift away from the Middle East, because this area is always very unstable and obviously they want to protect themselves… and try to diversify their sources of import, which would benefit the US shale production…,” Shirkhani said.

According to Gupta, Russia, which has plentiful oil reserves and had reduced oil production per an agreement with OPEC, is in a prime position to benefit from the Saudi woes.

“In terms of which countries would benefit the most, what you are looking for is who will be able to plug the gap; the first country that comes to mind is Russia,” Gupta said.

“The minute they are able to restore the deficit in the market, you should see prices [stop changing significantly, which] is what investors are looking for: less uncertainty, more price stability.”

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