Tanker market stalls after latest attack on oil facilities

Saudi Arabia’s return to its full oil supply capacity could take “weeks not days”, Reuters reported last week, leading shipbroker Banchero Costa to say in its weekly update that more tanker market turbulence could be expected in the coming weeks, as a result of the September 14th drone attacks on Saudi oil facilities.

The attack cause the suspension of production of 5.7m bpd of crude oil, or nearly 60% of the Saudi Arabia’s average daily production in August 2019, and about 5% of global supply..

The Abqaiq facility is the largest crude oil stabilization plant in the world, processing more than 7m bpd of crude. It plays an important role in removing the sulphur impurities and reducing the vapour pressure of the crude, so that it is safe for tanker transport.

Saudi Arabia’s main terminals of Ras Tanura and Juaymah have seen an increase in the number of ships waiting at anchorage, as reported last week in IMN.

Banchero Costa observed that Crude prices rose on Monday September 16th by the biggest intra-day absolute amount ever seen (although not the largest percentage increase ever seen). Brent Crude booked its biggest intra-day percentage gain since the Gulf War in 1991, up by 19%. The price later fell back, but has held at a higher price since then.

Saud Arabia holds a significant amount of crude oil and petroleum products in storage. Aramco has the option to draw on the Kingdom’s 188m barrels of reserves to maintain exports of 7m bpd it exports (mainly to Asia).

The shipbroker warned that the attack could add significant risk premium to oil prices in the medium term, partly because it reduces the inventory and spare capacity cushion, which plays a key role in price formation.

However, developed economies’ oil stocks are above five-year averages. A global economic slowdown and increased output by other countries had already led OPEC considering an agreed reduction in production. That idea is now likely to be off the table.

The macro problem, Banchero Costa observed, was that the world’s spare capacity is not evenly spread throughout the world. The majority of it is in Saudi Arabia.

Before the attack, OPEC’s global supply cushion was just over 3.21m bpd, of which 2.27m bpd was with Saudi Arabia.

The remaining 940,000 bpd of spare capacity is held mostly by Kuwait and the United Arab Emirates.

Outside of OPEC, there is far less real “spare” capacity, with increases in production in the US hampered by the fact that its ports are operating near capacity.