Saudi Attack Shocks Oil Markets – What Do You Need to Know ?

Attacks targeting both the 7mn b/d Abqaiq crude processing facility and the 1.3mn b/d Khuaris crude complex on Saturday have cut Saudi Arabia’s production in half, with a Saudi Aramco press release stating that 5.7mn b/d has been shut-in. For reference, Saudi produced 9.8mn b/d in August. Whilst the market opened above $7 2 /bbl (up 20%) from the previous close, prices have since moderated, trading between $65-67/bbl. For context, this is just ~6 % (on average) above the intraweek high recorded last week Since June, oil markets have been pricing a slowdown in global oil consumption growth , with an anchor price of ~$60/bbl. We expect this anchor to move to $65/bbl in the near term as geopolitical risk is priced in . Whilst the initial return of some risk premium will add some dollars onto the price of a barrel , from a more structural perspective the full impact of this attack can only be assessed once the longevity and magnitude of any supply outage is known. From our initial review of flexibility in the global crude system (spare capacity, inventories and Saudi crude logistics), the market will be able to get through a ~ multi week period of reduced Saudi production with Brent prices trading between $65-7 5 /bbl. We expect Brent-WTI to narrow and Brent-Dubai to widen as Arab Light grades will be disproportionately impacted , which will support light grades . If production is brought back quickly (within a week or so ), we would expect a move back towards the low $60s in relatively short order. If, however the outage is pushed into the order of months, it is likely prices will move substantially higher. We base this on our expectations that for the duration of the outage, global inventories will be draining by ~1mn b/d, tightening markets significantly. In this scenario, prices would likely move into the $7 5 -8 5 /bbl Brent range for the duration of the outage. We point to the wea k long:short ratio in speculative Brent positions, ~5.6, compared to an year high of ~14 in early May 2019 and 32 in April 2018, (following the initial U.S. exit of the Iranian nuclear agreement). There is significant dry powder available for a speculative rally to drive prices higher .