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Oil Market Update - Unprecedented Saudi Oil Disruptions Drive Crude Price Surge

Brent price spiked as high as 20% to $71.95/bbl following drone strikes on Saudi Aramco’s oil processing facilities at Abqaiq and Khurais oil fields on Saturday, September 14, 2019. These attacks have knocked out about 5.7 mb/d of Saudi’s oil output, equivalent to c.5% of world crude supply and about half of the kingdom’s oil output.                                     

Outage duration to determine magnitude of impact on global markets
The recent attacks on Saudi’s oil infrastructure further intensify the risks in oil markets and global economy in general, particularly given the already underwhelming backdrop for weak global growth this year. As such, manufacturers across the globe will have to deal with higher fuel costs in the interim. Notwithstanding, we expect the impact of these attacks to be determined by how long it takes Saudi Arabia to restore and stabilize supply. We also note that the effect of this outage could possibly be buffered by efforts from the Trump Administration to support crude supply. Specifically, President Trump has reportedly ordered the deployment of oil from the U.S. strategic petroleum reserves if need be.                                                 

Crude shortage could portend short-term capital market windfall
Despite the negative impact on the global space, we expect this development to support Nigeria’s crucial oil revenue given higher oil prices. This consequently provides support for the nation’s foreign reserves, exchange rate stability. Given the strong correlation between crude prices and Nigeria’s economic health, we see possibility of a positive knee-jerk reaction to this development in the Nigerian capital market.
Similarly, upstream oil players in Nigeria will reap a positive impact from the surge in oil prices, as this remains a key driver of their profitability. We highlight a potential upside for SEPLAT, the largest upstream player listed on the equity market. For downstream companies on the other hand, this will lead to a rise in landing costs of petroleum products, further worsening the margins on the sale of regulated products (notably premium motor spirit). Brent crude currently trades at $65.69/bbl (Friday’s close: $60.20/bbl) while WTI is currently trading at $59.69/bbl (as at time of writing).