Oil prices increase following Saudi oil field attacks

There has been an oil price hike following the attacks on two of Saudi Arabia’s oil facilities last Saturday. On Monday, oil prices ended up nearly 15% higher.

Saudi’s Aramco announced the shutdown of half of its oil production after drone attacks by Yemen’s Houthi rebels. This can lead to the disruption of the global crude supply.

The kingdom of Saudi Arabia is the biggest oil exporter in the world. In June, Saudi stocks were around 188 million barrels.

By shutting down oil production, it can affect almost five million barrels of crude oil produced per day, which is about 5% of the world’s daily oil production.

US oil futures increased to as much as 14.7% before settling at $62.90 a barrel. The figure was the biggest jump since January 2009. The futures of Brent crude, which is the global benchmark, rose to about 14.6% at $69.02 per barrel.

“I think oil prices will be elevated for weeks, if not months. A risk premium will likely stick around for quite some time,” said the head of petroleum analysis at GasBuddy.com, Patrick DeHaan.

As for gasoline futures, it jumped to more than 13%, which is not good news for drivers and car owners.

The oil prices rose as much as 18% but it decreased after the United States President, Donald Trump, spoke about how the U.S. will be tapping its emergency oil supply.

“This is a big deal. It is the biggest shock to the oil markets since Hurricane Katrina. And like Katrina it will likely haunt us for months, at least weeks,” said Tom Kloza, a chief oil analyst for the Oil Price Information Service.

President Trump said it would be using oil from the Strategic Petroleum Reserve (SPR) to make sure the markets are well-supplied. The SPR has 645 barrels of oil which leave the United States with the world’s largest backup oil supply.

The United States’ SPR is kept in underground salt caverns across four sites in Texas and Louisiana, along the Gulf of Mexico.

Since it was established back in the 1970s, the SPR has only been drawn thrice so far. The first time it was used was in 1991 when the United States waged war against Iraq in Operation Desert Storm.

The SPR was also used in 2005 during the aftermath of Hurricane Katrina after oil infrastructure were destroyed in the Gulf of Mexico. The last time the SPR was drawn was back in 2011 when the conflict in Libya affected global oil exports.

Saudi authorities have not provided detailed accounts of the attacks. However, they have spoken about the country’s oil production.

The oil facilities of Saudi Aramco were badly affected by the drone attacks. Restoring production to what they were before the attacks happen could take weeks.

“Saudi authorities have claimed to control the fires, but this falls far short of extinguishing them. The damage to facilities at Abqaiq and Khurais appears to be extensive, and it may be weeks before oil supplies are normalized,” Abhishek Kumar, head of analytics at Interfax Energy in London.

The long term impact depends on how long it would take Saudi Aramco to reopen its production.

“A small $2-$3 per barrel premium would emerge if the damage appears to be an issue that can be resolved quickly, and $10 if the damage to Aramco’s facilities is significant,” said Ayham Kamel of the Eurasia Group in a note.

One of the problems highlighted by the drone attacks against Saudi Aramco’s facilities by Houthi rebels is that the world’s biggest oil producers are vulnerable. This could drive fear, which could then affect the market even after crude production resumes.

“The shock that such an event happened in Saudi Arabia, a stable and reliable oil producer, will likely continue to haunt the market,” adds DeHaan.

According to the chief commodities economist at Capital Economics, Caroline Bain, Saudi Arabia needs to restore its production capacity as soon as possible because by maintaining the supply, it can help relieve and ease the worries of investors.

“The rapid resumption of business, as usual, will reassure the oil market that Aramco is able to cope with militant attacks,” Bain noted.

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