Editor's Note: Our Energy Policy analyst Joe McMonigle published the insight below on Saturday night. For info on accessing our institutional research email sales@hedgeye.com.
The world’s largest oil processing facility at Abqaiq in eastern Saudi Arabia was attacked resulting in major damage on Saturday. Saudi energy ministry officials said in a statement that half of the kingdom’s oil production was halted because of fire and damage at Abqaiq but plans to restart production on Monday.
Responsibility for the attack was claimed by Houthi rebels but US security officials believe Iran was behind the biggest attack on oil infrastructure since the Iraq invasion of Kuwait.
Oil prices will surely spike on the news of the attacks when markets open on Sunday. In our view, there is almost no geopolitical risk priced into oil markets that are focused solely on the macro and trade narratives.
Previous attacks on tankers and oil infrastructure were not viewed as serious by the market but it is hard to ignore Saturday’s attack and damage at such a key facility at Abqaiq.
DOE’s Energy Information Administration (EIA) maintains extensive public and top-secret analysis of Saudi oil infrastructure. EIA’s public report calls Abqaiq “the world's largest oil processing facility and crude oil stabilization plant” with a crude oil processing capacity of more than 7 million b/d.
According to the EIA report:
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“Abqaiq processing plant is a vital part of Saudi oil infrastructure. Most of the oil produced in the country is processed at Abqaiq before export or delivery to refineries.” Abqaiq processes the majority of Arab Extra Light and Arab Light crude oils, as well as natural gas liquids (NGL). The facility's infrastructure includes pumping stations, gas-oil separation plants (GOSPs), hydro-desulphurization units, and an extensive network of pipelines that connects the plant to the ports of Jubail, Ras Tanura, and Yanbu (for NGL).” |
Damage reports are not well-known at this time so it is unclear if Aramco can restart production as per their statement by Monday. But we expect the Saudis to communicate clearly to the market on damage and down time. It’s also likely they will tap inventories to make up any production delays but those same stocks have seen draw downs over the last year.
In our view, oil fundamentals point to an already tight market. But current oil markets have been operating as if the market was oversupplied and demand is slowing. This weekend’s attack on key oil infrastructure so important to global production will test the oil market’s oversupply theory.
The attack also highlights the significant geopolitical risk in oil markets that has not been priced in since the US-China trade war escalated in late April. In our view, it adds a new potential development not yet envisioned – a Saudi military response to continued attacks on its oil infrastructure.
While Houthi rebels in Yemen have claimed responsibility for the attacks, its sophistication and planning point to Iran’s involvement and assistance. US government officials on Saturday were already singling out Iran’s participation in a statement released by Secretary of State Mike Pompeo.
Earlier this week, oil markets anticipated “easing sanctions” on Iran as a result of NSC Advisor John Bolton’s departure from the White House and media reports about planning for a Trump-Rouhani meeting at the UN in New York this month. Now the week ends with Iran’s implicit answer to a possible meeting with the attack by its Houthi-allies if not by Iran’s central role.
As we said this week, the chances of a Trump-Iran meeting or easing sanctions are close to zero.
