Crude oil prices have been on a rollercoaster ride as tensions heat up in the Middle East. Drone strikes on the heart of the Saudi Arabian production complex – the Abqaiq processing plant (called the most important crude site in the world) and the 1.5 mmb/d Khurais oil field – took out 5.7 mmb/d of crude output. That’s the single largest outage of crude output ever – more than 1973 Middle East oil embargo, more than the Iraqi invasion of Kuwait, more than the 1978 Iranian Revolution. The fires it caused affected more than half of Saudi Arabia’s current crude production output and essentially wipes a large part of the country’s spare capacity. Fortunately, I have not read of any casualty reports from this massive incident.
Yemeni Houthi rebels have claimed responsibility for the attacks. There is some logic to this, given that the Houthi rebel have waged an extended campaign on Saudi oil facilities over the past few years, including a recent attack on the East-West Pipeline – part of a proxy war between Saudi Arabia and Iran backing different factions in Yemen’s civil war. But this incident is different. The Abqaiq crude facilities are near Bahrain, over 700km from closest Yemeni border, and over 400km further than the farthest attack into Saudi territory by the Houthis. For the Houthis to suddenly gain a tremendous amount of range in their attacks – especially given that the suspected drones involved in the attack only have a range of up to about 200km – seems implausible. Which is why the US has publicly blamed Iran for the attacks, releasing data and photos that claim the attacks came from a north-westerly direction. Iran, predictably, has claimed that it is not responsible. Other countries, including Saudi Arabia and the UK, have struck a more cautious approach, promising ‘investigations’.
Because the attacks occurred over the weekend, there was no immediate effect on traded prices. But when markets opened in Asia on Monday, crude oil prices soared by up to 20% at the highest point – with Brent jumping past the US$70/b mark – before settling back to a daily gain of 15%. Because the attacks were on such an important processing plant, market players worried about global supply disruptions that could last for months. President Donald Trump’s move to release US strategic petroleum reserves calmed the market slightly, while subsequent reports from Saudi Aramco that up to 70% of the affected 5.7 mmb/d capacity at Abqaiq had been brought back online provided even more reassurance. Initial fears that the attack would take months to fully restore Saudi Arabian output were downgraded to weeks; still a severe shock, but nowhere near the catastrophe that was suspected.
What is chilling, though, is where this will lead us next. This is the single largest attack in the simmering tensions of the Persian Gulf. With the US so eager to blame Iran, claiming that it was ‘locked and loaded’ for any possible conflict, the risk of military conflict in the region has risen to new heights. Iran has replied that it is also ‘always been ready for a full-fledged war’. We live in chilling times because of this. The supply disruption caused by the drone attack may have already be mitigated by quick action by Saudi Aramco, but the long-term implications are dangerous. War is always triggered by a series of escalating actions, and fears are that the attack on Abqaiq might be the straw that broke the camel’s back. And if that happens, the supply disruptions that will be spinning out of this war will be considerably more severe.
Recent attacks on Saudi Arabian oil infrastructure:
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The amount of natural gas held in storage in 2019 went from a relatively low value of 1,155 billion cubic feet (Bcf) at the beginning of April to 3,724 Bcf at the end of October because of near-record injection activity during the natural gas injection, or refill, season (April 1–October 31). Inventories as of October 31 were 37 Bcf higher than the previous five-year end-of-October average, according to interpolated values in the U.S. Energy Information Administration’s (EIA) Weekly Natural Gas Storage Report.
Although the end of the natural gas storage injection season is traditionally defined as October 31, injections often occur in November. Working natural gas stocks ended the previous heating season at 1,155 Bcf on March 31, 2019—the second-lowest level for that time of year since 2004. The 2019 injection season included several weeks with relatively high injections: weekly changes exceeded 100 Bcf nine times in 2019. Certain weeks in April, June, and September were the highest weekly net injections in those months since at least 2010.
Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report
From April 1 through October 31, 2019, more than 2,569 Bcf of natural gas was placed into storage in the Lower 48 states. This volume was the second-highest net injected volume for the injection season, falling short of the record 2,727 Bcf injected during the 2014 injection season. In 2014, a particularly cold winter left natural gas inventories in the Lower 48 states at 837 Bcf—the lowest level for that time of year since 2003.
Headline crude prices for the week beginning 4 November 2019 – Brent: US$62/b; WTI: US$56/b
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