Could Be "Weeks" Before Aramco Restores Full Production Capacity As Specter Of $100 Oil Looms

With the Saudis now racing to restore full oil production to normal levels as one Sunday morning headline noted, the industry is bracing for a potential significant delay in production — given rumors the fires at the facilities struck in the early hours of Saturday may not be fully "under control" as the kingdom was quick to assure hours after the raging explosions — which could translate into oil prices being very high for a long time. Industry sources said it could take weeks to return full production levels to normal.

Following what Yemen's Houthis claimed was their own successful targeting of Saudi Arabia's second largest oil field in the Khurais, as well as the sprawling Abqaiq oil processing facility in Buqyaq  described by Aramco as "the largest crude oil stabilization plant in the world" — the Saudi company acknowledged it was forced to slash its output by half, equal to about 5% of world supply, specifically 5.7 million barrels a day of oil production lost. In the meantime, Saudi Arabia’s stock market fell by 2.3% at Sunday’s open.

Satellite imagery showing the scene at Abqaiq crude processing facility in Buqyaq,Sept. 14, 2019. Via Planet Labs/NBC

What will Monday bring? Upon market opening there's widespread prediction oil will rally by $5 to $10 per barrel, and as we were among the first to notecould eventually hit $100 per barrel — the latter alarming scenario dependent on how slow or fast the facilities can be brought back online.

As Bloomberg detailed, citing insiders familiar with Aramco operations:

Aramco would need weeks to restore full production capacity to a normal level, according to people familiar with the matter. The producer however can restore significant volume of oil production within days, they said. Aramco could consider declaring force majeure on some international shipments if the resumption of full capacity at Abqaiq takes weeks, they said.

Aramco's president and CEO Amin Nasser announced Sunday, “Work is underway to restore production and a progress update will be provided in around 48 hours.” 

Though the company says alternative plans are in place to temporarily make up for the shortfall, such as tapping Aramco's global storage network, the 5.7 million barrels a day outage is the single worst supply disruption even over and against that brought on by the first Gulf War and the 1979 Islamic Revolution in Iran.

“If it’s protracted it could be a big challenge for the oil markets,” Mele Kyari, CEO of Nigerian National Petroleum Corp. told Bloomberg Television on Sunday of the "significant disruption". 

Meanwhile NASA satellite imaging showed that 24 hours after the attack, smoke over Abqaiq had dissipated, but elsewhere in Ghawar oilfield, the world’s largest, multiple massive plumes were still visible.

Though other installations like Ghawar were not attacked, excess oil and natural gas going to Abqaiq have to be burned off via relief flares due to emergency shutdowns.

Hours into the daylight hours of Saturday even after Saudi authorities and state media claimed the fires were "under control", skeptics analyzing local photos as well as satellite imagery said it wasn't the case that the facilities had blazes under control as fast as they claimed.

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Finally, courtesy of Reuters, here is a brief line-up of early reactions from market trader and analysts via Reuters:

Bob McNally, Rapidan Energy

Crude prices would spike by at least $15-20 per barrel in a seven-day disruption scenario and go well into triple digits in a 30-day scenario.

"This does not include what are likely to be large (if difficult to model or predict) premia to reflect zeroing out of global spare production capacity amidst ongoing disruption risks, hoarding, and panic sentiment."

Greg Newman, Onyx Commodities

Expects Brent futures to open $2 per barrel up and close $7 to $10 per barrel higher on Monday. The market could see a return to $100 per barrel if the issue cannot be resolved in the short term.

In the swaps market, Dubai timespreads could see a $1.50-$2 barrel backwardation as end-users scramble to cover shorts for short-term loading.

Refined product prices will be strong, with particular emphasis on high-sulphur fuel oil given current tightness and that it is the refinery product most closely linked to Saudi heavy crude.

Ayham Kamel, Eurasia Group

"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."

"The scale of (the) attack will encourage markets to re-examine the need for considering an oil geopolitical risk premium ... The attacks could complicate Aramco’s IPO plans given rising security risks and potential impact on its valuation."

"The U.S. would only release crude from its strategic reserves if damage to infrastructure appears critical or oil prices spike significantly."

Samuel Cizul, Els Analysis

"The outage of 5 million barrels per day (MMbbl/d), roughly half of the current Saudi production level and about 5% of global supply, is very large by historic standards. It would in relatively few weeks start to put a stress on the market."

"This incident is a very uncomfortable wake-up call to radically higher risk premiums on Gulf production."

Christy Malek, JP Morgan

"I'd expect a $3-$5 move in oil prices in the short term. The market has been sleep-walking in risk premium in the region, disproportionately focusing on risk to demand growth and shale oil supply."

"This attack introduces a new, irreversible risk premium into the market."

Expects oil to rise to $80-90 a barrel over the next three-six months as the market turns its focus to geopolitics.

Gary Ross, Black Gold Investors

"The heart of the Saudi oil industry has been successfully attacked so look for prices to rise substantially to $65-$70 per barrel."

"These attacks are difficult to stop and could occur periodically. The market has to price this risk in."

John Driscoll, JTD Energy

"This is significant as it takes out twice the volume of the spare capacity in the market, which is at 2-2.5 MMbbl/d"

"There’s going to be an initial panic reaction. Anyone who’s hedged on the short side will want to get out quickly. This may cause a significant spike upwards."

Tilak Doshi, Muse & Stancil

"In the oil universe, this attack is perhaps equivalent to the 9/11 attacks ... Abqaiq is easily the world's single most important oil production and processing infrastructure site."

"This puts Iran's wars-by-proxy in the region squarely in the centre of the security concerns of the Middle East."
"For Asian governments, perhaps this overtakes the perennial concern about the safety of tanker traffic in the Strait of Hormuz with even more serious concerns about the impact of a direct breakout of hostilities between the Saudi alliance and Iran."

"Governments throughout the Asian region will perhaps now be more supportive of the U.S. administration's tough sanctions regime on Iran."

And so, the world now awaits the looming potential shock in energy prices as markets open at the start of this week.