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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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$300 Oil: What If The Attacks In Saudi Arabia Had Destroyed Production?

Saudi Arabia’s Crown Prince Mohammed bin Salman (MBC) has told CBS that oil could reach “unimaginably high numbers” if a war with Iran were to erupt, which he suggested could happen if “the world does not take a strong and firm action to deter Iran.”

And while MBS is known to engage in hyperbole when it comes to the threat Iran poses, recent events suggest he may have a point here. But what are these unimaginably high numbers he is suggesting? $100 per barrel? $300 per barrel? And what would the world look like if prices really went that high?

The recent drone attacks on Saudi Aramco’s oil facilities, which took 5.7 million bpd offline, have been largely attributed to Iran – even if the Houthis have claimed responsibility for them. This attack was evidence that Iran does have the means to strike at the heart of Saudi oil structure and, in an all-out war, it is reasonable to suggest a strike on those facilities could be far more devastating. In that scenario, those 5.7 million bpd could be taken offline permanently – leaving the global oil industry in a very precarious position. 

While this may be a hypothetical scenario, it is one that the September 14th attacks proved were possible, and it is in the light of those attacks that MBS’ words can be fully understood. A destructive attack taking almost 6 million bpd in oil production offline – permanently - would certainly have a much deeper impact on oil prices than the actual attack on Saudi facilities did. Following that attack, Brent briefly topped $70 a barrel and then retreated quickly on assurances from Riyadh. Then the international benchmark rose sharply once again - albeit not as high - when reports emerged that repairs might actually take months rather than weeks. But in the end, the panic was short-lived, and as newer information came in regarding Saudi Arabia’s ability to quickly bring production back online, oil prices eased back down, almost like it didn’t happen at all.

Days after the attacks, some analysts were forecasting $100 Brent prices, but there were also more sober minds that said there was no reason for oil to rise so high given that some OPEC+ members could increase production and that U.S. shale would do the rest. But this reliance on U.S. shale and other OPEC members are perhaps a little optimistic in such a scenario. Related: Don’t Expect Oil Prices To Go Much Higher This Year

Iran and the UAE are the two OPEC members with the highest potential spare capacity, but if Iran and the UAE were at war they would likely see their production drop even further. That means that nearly all of the 5.7 million bpd would have to be replaced by the US, something that even the most ardent shale supporter would struggle to believe.

The United States has increased production substantially in the last year, but that upwards momentum may not be sustainable. In its latest Short-Term Energy Outlook, the EIA has estimated that production has risen by 1.2 million bpd from 2018. But that growth has been tempered by recent poor results from some of the U.S. most promising shale basins.

The reality is, there is no single oil producer that could increase production by 6 million barrels per day, and that 6 million bpd is realistically a conservative estimate if a full-blown war were to occur.

If 6 million bpd or more were taken offline for any significant timeframe, which could be caused by anything from the very real possibility of a closing of the Strait of Hormuz to another attack on Saudi Aramco oil infrastructure, oil prices would indeed spike to ‘unimaginable levels’.

If it were unclear when production could resume, a mad scramble would ensue to see who could pick up the slack - not to keep prices down, but to see who could steal the market share. Countries would undoubtably do their best to ramp up production, but it would be insufficient. The global Strategic Petroleum Reserves would all be tapped to keep the market supplied, but that is very much a short term solution.

Major oil consumers such as China and India would be desperately searching for alternate suppliers. But more importantly, these major consuming countries would be crushed if oil prices soar beyond $100. It’s hard to tell how much oil China has in storage, and if they could cushion the blow, but they would use up whatever they did have rather quick.

India is already trying to beef up its oil in storage to brace for trouble in the Middle East, and it is working on building additional storage sites that will be ready next year. India’s goal is to eventually have 90-100 days of oil in storage, to sustain its 80% import rate.

Chinese data is more murky, but it is widely accepted that China has been beefing up its oil in storage, taking advantage of moderate oil prices. Related: Big Oil Fights For Its Life

Japan and South Korea are also large importers, with Japan having sizable reserves somewhere near 300 million barrels.

Despite the release from various SPR’s, the long-term reality of oil markets would keep prices extremely elevated until new production came online, or until demand destruction took place.

But how high could oil prices really go? In the event of 6-month long disruption of 6 million bpd, $100 oil certainly seems possible, but what if the 20 million bpd Strait of Hormuz gets cut off for a number of days or even weeks? Or what if production capacity in several other Gulf nations gets disrupted? A supply crunch the size of 20 million bpd could potentially send oil to $300. But oil prices don’t have to go that high to seriously upend high consumption economies.

India has been quick to sound the alarm every time Brent has climbed higher than their pain threshold, which is lower than $80. This would inevitably lead to demand problems. We have seen this several times already: oil prices jump, demand slackens, oil prices fall, demand improves, and then the global economy keeps growing.

The largest buyers of crude oil in the world would have a hard time sustaining growth if oil is trading close to $100, let alone if oil trades at $200 or even $300 per barrel. And the time it would take for oil prices to come back down again would be painful.

In the light of this historical evidence, MBS’ thinly veiled warning about oil prices can largely be seen as sabre-rattling, but the prospect of ‘unimaginably” high prices is perhaps not as farfetched as some analysts would have you believe.

By Irina Slav for Oilprice.com

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Leave a comment
  • Brent Jatko on September 30 2019 said:
    Answer: after a wrenching adjustment period, we'd get off of dirty fossil fuels and take the power back from the medieval theocrats of the Middle East.
  • Lee James on September 30 2019 said:
    Oil dependency is risky business, now more than ever.
  • Mamdouh Salameh on October 01 2019 said:
    One pivotal fact that the global oil market should be aware of is that the entire Saudi oil industry has become a hostage to Iran and their allies in Yemen the Houthis as long as the Yemen war is raging and Saudi Arabia joining the US-Israel axis against Iran.

    The destructive strike by the Houthis against Aramco’s Abqaiq processing station the world’s largest and the Khurais oilfield one of five supergiant oilfields sustaining Saudi oil production has demonstrated how vulnerable Saudi oil infrastructure is to attacks.

    If the Yemen war continues, it is possible that the Houthis will try to cripple Aramco’s Ras Tannura crude oil-loading terminal, the world’s largest with a capacity for storing 33 million barrels (mb) and a loading capacity of 6.6 million barrels a day (mbd). A successful strike against Ras Tannura would eliminate the entire Saudi oil exports depriving the global oil market of some 7 mbd.

    Even then oil prices will never hit $300 or $200 or even $150 a barrel for two reasons. The first is that if repairs to the damaged infrastructure could be completed within one month or less, the oil price would only surge to $75-$80.

    If, however, the repairs take 2-3 months, we could see oil prices surging to $100-$110.

    Extra supplies to offset the Saudi production loss could come from OPEC+ cancelling its production cut agreement and returning 1.2 mbd to the market, UAE and Iran using their spare production capacity, and a release of supplies from the US Strategic Petroleum Reserve (SPR) and the International Energy Agency’s reserves.

    And contrary to unsubstantiated claims by the author of this article, the global economy would be invigorated by an oil price ranging from $100-$110. This is a fair price for the global economy and I will explain why.

    The three biggest chunks of the global economy are: global investments, the oil industry and the economies of the oil-producing nations. An oil price ranging from $100-$110 a barrel will enhance global investments particularly in the oil and gas outlets. Moreover, such a range of price would enable the global oil industry to balance its books and finance projects around the world. It will also enable oil-producing nations to expand capacity and explore for oil to be able to meet future oil demand.

    As for China, its economy was growing at 8%-9% in 2008 and after even and when oil prices were hitting $120 or even higher.

    Although current prices are facing huge bearish influence, they could start to surge to $80 and beyond if it was confirmed that the repairs to Aramco’s Abqaiq processing station and the Khurais oilfield would take months rather than weeks as contractors and fabricators told the Wall Street Journal. Saudi stored oil estimated at 130 mbd would be totally exhausted in less than a month.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • John Di Laccii on October 01 2019 said:
    Mamdouh, I agree with this. Even one rocket at the north side of Sea Island of Ras Tanurah, berths 19 and 20 for ULCC, and one at Juaymah Offshore Platform supplying 6 SBMs in Juaymah, would kill them. Let allone a few more at gas power plants nearby. They seem to by like Achilleus of a sort....
    And then a few in Dhahran main building, Ghawar field.. you name it.. a few in ..
  • Cornelis van Santen on October 01 2019 said:
    First, it is crazy that the "world" still depends on a few unstable countries for their energy needs. I was at Bahrain on round X-mas during the oil crisis and than in January in the Netherlands having car-free Sundays. Then there was a call to get independent! So long ago and still humans have not learned this lesson. Maybe that is why NASA is looking for intelligence in the Universe. Than I moved to Venezuela and this country can be the key. If the civilized world didn't had permitted this country to be taken over by "aliens" than we would have at least 3 MBls/day of oil for sure and the possibility to increase to 5 MBls/day as projected decades ago. I had to leave Venezuela, but if this country return to "normal", then their is a possibility for 3 to 4 MBls/day in oil export part of which could be refined in Curacao & Aruba. So free Venezuela but also go ahead with clean renewable energy and do not allow monopolies. Don't be afraid for changes, any change is an opportunity.

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