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- Reports suggest Houthi rebels successfully attacked a crude oil processing facility, handling 5m b/d of Saudi oil output. This is the largest outage in the history of the global oil sector. US Secretary of State Mike Pompeo has alleged Iran was directly behind the attack.
- Early indications are that oil output will be offline for a short period (48 hours) and that Saudi has enough oil stocks to continue supplying global markets. However, their remains considerable uncertainty at the present time and images of the fires make this seem optimistic.
- If the shock is truly temporary, it would still have important implications for the global oil market and the GCC as a whole. Markets are likely to price in some form of reprisal as well as the prospect of a direct confrontation between Saudi and Iran.
- If the shock is more permanent (lasting a few months or longer), we expect oil prices to rise dramatically, between $10-30/b based on past historical estimates of geopolitical oil price shocks.
- In either case, this shock will not be positive for Saudi Arabia. Even if oil prices spiked to $100 b/d, oil revenues would still be less compared to full production and prices at $60 b/d. Furthermore, diversion of oil trade away from Saudi and the region is likely.
- We expect sentiment around regional asset prices to also be negatively affected due to concerns around further conflict escalation.
- At this stage, it is hard to know more, we will continue to provide updates as new information arises and we will provide a full report once the market has reacted on Monday.
Overnight on Friday, the Houthi rebels in Yemen executed drone strikes on two significant targets in eastern Saudi Arabia, the Khurais oilfield, with produces about 1.5m b/d and, far more seriously, the Abqaiq stabalisation facility which processes about 5m b/d. This is the largest outage in the history of the global oil sector.
Its duration, and the ability of the Kingdom to maintain supplies from inventory, will obviously impact short-term prices and a risk premium will persist thereafter. The impact will also be felt in Saudi and regional bond and equity markets. Much depends on whether a military or diplomatic solution can be found to prevent such attacks in the future. There have been two other similar attacks since May, but none as serious.
Initial reports are suggesting that Abqaiq will only be offline for about 2 days and the Kingdom has adequate inventory to continue supplying the global market during that outage. However, that seems surprisingly optimistic given the images of the fires on the ground, and the plumes visible in satellite images.
Ultimately, a negative supply shock of this magnitude would be harmful to the Saudi economy. Higher oil prices would be more than offset by lost production and risks of weaker global oil demand at an already precarious time.
