Drone attacks have halved Saudi Arabia’s crude output, raised prospects of further unrest in the Middle East
Drone attacks on key Saudi oil facilities have halved crude output from OPEC’s biggest exporter, catapulting oil prices by the largest amount since the first Gulf War. The crisis has focused minds on unrest in the crude-rich Middle East, with Tehran denying Washington’s charge that it was responsible.
Brent oil prices leapt 20 percent on Monday to chalk up the biggest intra-day daily gain since 1991.
Here is a breakdown of winners and losers from runaway oil prices and Saudi unrest:
Saudi Arabia, the biggest loser?
Saturday’s attacks on national energy giant Saudi Aramco’s Abqaiq processing plant and Khurais oil field knocked 5.7 million barrels per day off production, more than half of its total output. Riyadh, which depends its oil sector to lift revenues, is de-facto leader of the 14-nation Organization of the Petroleum Exporting Countries (OPEC).
Soaring world oil prices traditionally boost the coffers of OPEC nations—but most experts contend that Saudi will likely not benefit this time. “If oil prices remain high, and especially if they keep rising, this is most likely to be due to sustained disruption to Saudi production—so they won’t be in any position to benefit,” independent economist Julian Jessop told AFP.
Saudi authorities are meanwhile considering whether to delay an initial public offer of Aramco shares, according to people familiar with the matter.
OPEC and Russia
OPEC, whose 14 member nations together pump just under one third of the world’s oil, are already seeking to curb supplies and lift prices. The cartel in July signed a new charter of cooperation with major allies including Russia as they agreed to prolong daily production cuts.
The weekend drone attacks could boost producers with spare capacity—yet also exposes simmering tensions between Riyadh and Tehran. “Other OPEC producers will benefit more—and non-OPEC, notably Russia,” added Jessop. “But location still matters. Anyone dependent on shipping their oil or gas via the Straits of Hormuz may also find their markets cut off if tensions do escalate. Countries with spare capacity will benefit the most, but even those producing at capacity will be able to sell their oil for a higher price.”
United States the biggest winner?
The United States should reap the benefits due to its status as the world’s biggest oil producer on booming shale oil. “This means that the U.S. shale industry will directly benefit … and it will be interesting to see how quickly additional barrels can be brought onto the market from the U.S.,” said JBC Energy analysts. “However, this question is—at least for the next couple of months—less one of actual production, but much more one of logistics. We would expect a surge in U.S. crude exports over coming months.”
In order to cushion the market impact, U.S. President Donald Trump on Sunday authorized the release of oil from U.S. strategic reserves.
Tehran, which has already been slapped by U.S. sanctions, stands accused by Washington of being behind the attacks. Trump has already threatened action against the Islamic republic, warning that the U.S. was “locked and loaded” to respond.
The archenemies remain in a tense standoff since the U.S. in May 2018 unilaterally pulled out of a multilateral accord that limited the scope of Iran’s nuclear program in exchange for sanctions relief. The escalation has been accompanied by ships being mysteriously attacked, drones downed and oil tankers seized in the Strait of Hormuz—a chokepoint for a third of the world’s seaborne oil.
The global economy, which is suffering from a sharp slowdown amid the China-U.S. trade war, is likely to take a hit from soaring oil prices, analysts say.
The commodity is regarded as a key barometer of growth because it greases the wheels of the world economy and is vital to most economic activity. Runaway oil prices meanwhile feed through into higher consumer prices and risk stagflation, whereby they suppress growth yet fuel inflation.
“The attack on Saudi oil is unlikely to be a disaster for the global economy,” said Jennifer McKeown at Capital Economics. “But growing tensions in the Middle East are another headwind for the global economy in already uncertain times, and a full-blown conflict could trigger another leg in the global downturn.”
Blow for China
China, which remains entangled with the United States in a trade war, is also expected to suffer due to its oil-dependent and energy-hungry economy. The Asian powerhouse, whose growth is faltering, is also struggling with spiking inflation and a badly performing manufacturing sector.
Yet oil demand is already waning in the face of weaker growth. “While some are forecasting an imminent jump in crude oil prices to $100, we see less upside risk than that,” said Prestige Economics analyst Jason Schenker. “After all, the global economy has slowed sharply, and China as well as Europe are in the midst of manufacturing recessions.”