Saudi Aramco may need “weeks” to fully restore production taken offline in Saturday’s drone attacks on Abqaiq and Khurais, sources said Sunday.
Energy minister Prince Abdulaziz Bin Salman confirmed on Saturday evening that the drone strikes caused the interruption of crude supplies estimated at 5.7 million barrels. A statement from Aramco said the company would update the market on its progress within the next 48 hours, “God willing”.
Although Riyadh believes a sizable chunk of output can be restored within days (Saudi officials said Sunday to expect restoration of around one-third of lost output by day’s end on Monday), full restoration of Saudi production capacity could take far longer, people familiar with the matter suggested. According to sources who spoke to Bloomberg, Riyadh “may consider force majeure on some international shipments” if the resumption of full capacity at Abqaiq does in fact take longer than hoped.
Read more: It’s Official, 5.7 Million Barrels Of Saudi Oil Production Shut After Aramco Drone Attacks
Mike Pompeo on Saturday blamed Iran for the strikes and cast doubt on whether they originated from Yemen.
Needless to say, just about the last thing a global economy struggling to cope with the perils of the trade war needs is a sudden spike in oil prices tied to anything other than a brightening growth outlook.
The world is mired in a manufacturing slump and there were already questions about demand. Initially, any price surge tied to geopolitical flareups would make the demand question irrelevant, but if the tension and higher prices persist, it might well dent demand further, especially if there’s no good news on the trade front. Prices are down sharply from the 2019 peak in April.
“Energy Secretary Rick Perry stands ready to deploy resources from the Strategic Petroleum Oil Reserves if necessary to offset any disruptions to oil markets as a result of this act of aggression”, US Department of Energy spokeswoman Shaylyn Hynes said, adding that Perry has directed subordinates to consult with the International Energy Agency “on potential available options for collective global action if needed”.
“The IEA is monitoring the situation in Saudi Arabia closely”, the agency said in a tweet, adding that it’s “in contact with Saudi authorities as well as major producer and consumer nations”.
The Saudis can draw on reserves inside the country and customers can count on supplies for at least a few weeks thanks to Aramco’s ability to draw down on a sprawling network of storage, including tanks in Rotterdam, Okinawa and Sidi Kerir, Bloomberg reminds you.
“For now, markets are well supplied with ample commercial stocks”, the IEA promised.
For now.
So how do you think you would react to this story if you were on the Federal Reserve Board? My first thought is that (a) this is temporary, and (b) any change in prices doesn’t impact core inflation numbers. It’s not going to affect the next rate cut. Still, I wonder, wouldn’t it be a nagging issue as you thought about future rate cuts? Oil prices might temporarily affect inflation. New tariffs might affect inflation. And employment is low.
And how temporary is the spike in oil prices? How long will it take to get back to full production? And if it only costs $15K to build a drone, is this the last supply disruption we are going to see?
If you are on the Fed, doesn’t it feel a little strange to be voting to constantly cut rates when unemployment low, and inflation is rising above your target, even if you suspect the increase in inflation is temporary? Might you want to go slowly to verify that the increase in inflation is temporary? It won’t affect the next cut, but do you think this might affect cuts later in the year?
It would be interesting to see if stockpile capacity had been building up in any unusual way in the last year or so ….
From BofA: “Saudi Arabia maintained strategic stocks of c190mn bbl as of June, according to JODI
data. Should the production loss be fully translated to exports, then the strategic stocks
would last c1 month. This suggests that Saudi Arabia would be forced to deplete its
stocks within a few weeks to keep its level of exports stable, and would be unable on its
own to prevent a disruption to markets beyond that point.”
Summarized from BBG:
Ras Tanura crude storage = 39.2m bbl, or 61.6% of capacity, as of Sept. 5. Ras Tanura avg. 39.1m bbl over past 12 months, ranging from ~35m-45m bbl
Yanbu stocks were 31.1m bbl as of Sept. 9, or 59.3% of capacity. Stocks there averaged 27.1m bbl over past year