Swift loadings after attacks demonstrate resilience of Saudi oil industry
The steepest single day fluctuation in oil history took place when Brent crude price skyrocketed by 19 percent to $71.95 per barrel on the market opening on Monday. It followed the attacks on the world’s largest crude oil processing facility in Saudi Arabia — itself the world’s largest oil exporter and the only swing producer with spare capacity in excess of 2 million barrels per day (bpd). OPEC’s biggest and most influential member produced 9.77 million bpd in August and exported around 7 million bpd, according to Platts. The attacks on the Abqaiq plant and the Khurais oil field have taken 5.7 million bpd of oil production offline, about half of Saudi Arabia oil output and 5 percent of global supplies. Saudi crude oil is the first crude to be processed in most of the highly sophisticated refineries on contractual volumes, with the remaining balance bought from the spot market. The attack will further tighten global crude stocks regardless of the International Energy Agency (IEA) suggestion that oil markets are “well supplied” with ample commercial stocks following the attacks.
This outage clearly shows that global crude oil supply is extremely fragile and that there is a lack of global spare production capacity, except in Saudi Arabia. The impact of this is being felt across upstream and downstream markets.
S&P Global Platts estimates that global crude oil spare capacity is 2.3 million bpd, but more than 1.6 million bpd is in Saudi Arabia, highlighting how vulnerable the global market is to supply-side risks.
It is impossible for all global producers in OPEC or non-OPEC to be able to replace this huge output shortage of 5.7 million barrels per day.
Even if Iranian crude was back on the market it would not be enough. Releasing the US Strategic Petroleum Reserves (SPR), would also not be enough.
The US SPR holds about 644.8 million barrels of crude in four sites in Texas and Louisiana, including 250.3 million barrels of sweet crude and 394.5 million barrels of sour crude, according to IEA. That is equivalent to 90 days’ worth of net US imports.
Despite half of the Kingdom’s capacity being affected, the Kingdom will maintain exports by supplying customers from stockpiles. According to the Joint Organization Data Initiative (JODI), Saudi stockpiles totaled 187.9 million barrels in June. This implies that the Kingdom has 26.8 days of cover, assuming zero crude production.
Loadings to customers are back to normal within only 36 hours — challenging the view among some oil media outlets that the attacks laid bare the Kingdom’s oil shock vulnerability. Saudi tanker loadings were effectively resumed to all Aramco customers on Monday afternoon (around 35 hours from the attack). This is the shortest demurrage incurred in a force majeure case in the history of the oil industry.
It demonstrates the resilience of the Saudi oil industry as crude kept flowing to all customers.
Saudi crude is generally a mix of light, medium and heavy to medium sour grades with high sulfur content that yields more middle distillates ( jet kerosene and diesel) that are needed for the upcoming Fall and Winter seasons.
The Arabian Light and Extra Light crude grades that are processed in Abqaiq might now be replaced with medium and heavy crude grades.
In the petrochemicals sector, SABIC is reported to have cut some feedstock supplies to some subsidiaries. However, this could be mitigated by starting the seasonal shutdowns early.