The Lede Explains: The New Oil Crisis
Saudi’s Aramco facilities were hit by a drone attack leading to fears of oil crisisPhoto credit: Al Jazeera

The Lede Explains: The New Oil Crisis

Former Lebanese Minister of Economy and Industry Nasser Saidi tells <i>The Lede</i> that lack of clarity from Saudi Arabia is a problem as we do not know the extent of damage

In a response to drone attacks on Saudi Arabia’s Aramco oil facilities in Khurais and Abqaiq – the world's largest oil processing facility and crude oil stabilisation plant –on Saturday, United States (US) President Donald J Trump tweeted that the US has "reason to believe that we know" who is behind the attack.

Drones ‘shot’ by Houthi rebels from Yemen, has knocked out 5.7 million barrels of daily crude production — or 50% of the Saudi’s oil output – which more than 5% of global daily oil production.

Even as key questions remained unanswered — like where the drones were launched from - Trump had tweeted on September 16 that “Saudi Arabia oil supply was attacked. There is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom as to who they believe was the cause of this attack, and under what terms we would proceed.”

Eventually, not only Trump’s "locked and loaded” tweet hinting at Iran’s involvement has escalated the fear of war in the region but also has pushed the global crude prices up.

Oil prices surged on Monday, with Brent crude posting its biggest intra-day percentage gain since the Gulf War in 1991.

International benchmark Brent crude oil price spiked by as much as 19% to $71.95 a barrel while US West Texas Intermediate (WTI) jumped more than 15% to a session high of $63.34 a barrel, before gains were pared later when Trump tweeted that he has authorised the use of the country's emergency stockpile to ensure stable supply.

“Based on the attack on Saudi Arabia, which may have an impact on oil prices, I have authorized the release of oil from the Strategic Petroleum Reserve, if needed, in a to-be-determined amount sufficient to keep the markets well-supplied. I have also informed all appropriate agencies to expedite approvals of the oil pipelines currently in the permitting process in Texas and various other States,” his tweet read.

However, crude oil prices were higher Monday morning in Asia despite plans by the US and Saudi Arabia to release crude oil stocks.

According to S&P, at 09:38 am in Singapore (0138 GMT), ICE Brent November futures rose $6.96/b (10.36%) from Friday's settle at $67.18/b, while the NYMEX October light sweet crude futures contract was up $5.68/b (10.41%) at $60.53/b.

Will Prices Go Beyond $100/barrel?

Meanwhile, Cyril Widdershoven, a Middle East defense energy analyst, told The Lede that in case of a war, or a full-scale Saudi/UAE or US reaction on Iran, which will lead to a full-scale military confrontation, price spikes of above $100 per barrel are very feasible.

“At this moment oil prices will not be hitting $100 per barrel, too much oil still in storage worldwide, while recovery of Saudi options are already in place,” Widdershoven, who has worked for years in Middle East and North Africa region, added.

Widdershoven who holds degrees in Middle East Studies War Studies, said that full scale war in the Gulf, involving Iran-Saudi, will have a detrimental effect on UAE-Iraq-Kuwait oil and gas exports and block LNG exports from Qatar in full.

“What is more threatening is the option that Iranian proxies, such as Hezbollah and Hamas will try to involve Israel. For Iran, the latter is not to be wanted, as it would involve a higher level of military answers against them,” Widdershoven said adding that price spikes at that time of $125-150 are possible, as it takes out a vast amount of oil and gas, which is not able to be substituted by any other party in the world.

On Saturday, after visiting the incident locations, Amin H Nasser, Saudi Aramco President & CEO, said: “We are gratified that there were no injuries. I would like to thank all teams that responded timely to the incidents and brought the situation under control. Work is underway to restore production and a progress update will be provided in around 48 hours.”

Will Damage Be Fixed Soon?

Meanwhile, Dr Nasser Saidi, economist and former Lebanese Minister of Economy and Industry, told The Lede that the attack on Saudi Aramco facilities has raised uncertainty about Saudi oil production as well as reserves (oil fields) that may be subject to other attacks leading to supply disruption.

“The attacks also cast a shadow over the much-discussed Aramco IPO, which may be further delayed, while the value of the reserves and therefore the valuation of the company would be reduced,” Saidi added.

According to media, Saudi Aramco is gearing up for a two-part IPO, in which it hopes to first sell a sliver of itself to investors on the local Saudi exchange, and then list shares internationally.

“More problematic and a much higher source of risk and determining factor on the future course of oil prices is whether the attacks could become a casus bello for military confrontation and war with Iran. In turn, this could lead to a wider confrontation in the Gulf region affecting oil supplies and the economies of the region.

Such a scenario would be more likely to lead to higher prices reaching $100 or above and would be disruptive to financial markets and accelerate the global growth slowdown we have witnessed in 2019,” Saidi adds.

What Does High Oil Price Mean To India?

While Saidi says that higher oil prices will mean a higher import bill for India and higher domestic fuel and energy prices leading to an increase in consumer price inflation, Widdershoven says that India’s full-scale energy reliance on MENA region is clearly an issue to be discussed.

According to Saidi, India is the third-largest oil importer globally; after being unable to buy oil from Iran (after US sanctions were reimposed), oil imports from Iraq, Saudi Arabia and US filled the void and depending on how long prices will remain high, this could be a major macroeconomic shock for India, leading to lower growth and unemployment.

“With the drone attacks and potential for military confrontation, oil supply uncertainty has now been ratcheted up. Importers like India and China will now want to have higher levels of inventories, leading to higher demand and prices,” he adds.

Meanwhile, Widdershoven says that higher price levels will increase customer prices of fuels, petrochemical products and total gas supply and at same time, full scale higher price settings will have an effect too on other products, as energy is part of the latter too.

“India’s full-scale energy reliance on MENA region is clearly an issue to be discussed further,” Widdershoven added.

US Satellite Images

The US government released satellite images showing direct hits on critical spheroids use to treat the crude. Dan Tsubouchi, Chief Market Strategist at a Canadian Equity and Credit Investment firm SAF Group, tweeted that “We think this is a mths (month’s) fix, not days/weeks. Oil going up even higher.”

Quoting sources, Reuters also reported that Saudi Aramco’s full return to normal oil production volumes “may take months.”

Meanwhile, on being asked as to how long the higher prices will continue, Saidi said that markets will initially panic and this is visible in the almost 20% jump in prices initially and although this may be a temporary spike (markets have already calmed down) - much depends on the supply interruption and its duration.

“Lack of clarity from Saudi Arabia is a problem: we do not know the extent of damage to judge whether it is a short term supply interruption that can be compensated from oil in storage (from petroleum reserves in Saudi, the US and elsewhere) or made by up other countries (including US shale production) with spare production capacity, or more extensive damage requiring several weeks of work.

Some reports claim that the almost 1/3rd of the damage will be repaired by today. If damage is limited then oil prices will subside down to around $70,” he added.

However, Widdershoven said that a higher price level is to be expected for a long period, as the attack on Abqaiq is an attack on the heart of Saudi Arabia.

“Not due to prices, but it is the HEART of the Saudi economy at present. Also, it has made clear, at least to some, that energy infrastructure is much more threatened than people until now have been thinking.

Hopefully a stronger realism is now in place that the future of the global economy is not only demand, but supply! The low-level threats of drones (if used, as it could be cruise missiles) to energy infra (the blood of the global economy) is underestimated, should have been taken more seriously,” Widdershoven added.

Is it Iran?

Satellite images released by the US revealed that around 17 "points of impact" at an oil processing facility in Abqaiq and another two points of impact were found at Saudi's Khurais facility.

And senior US officials told media that damage indicates the attack could have been launched from Iraq or Iran and not from Saudi's southern neighbour Yemen.

US State Secretary Mike Pompeo tweeted that Tehran is behind nearly 100 attacks on Saudi Arabia while Rouhani and Zarif pretend to engage in diplomacy.

“Amid all the calls for de-escalation, Iran has now launched an unprecedented attack on the world’s energy supply. There is no evidence the attacks came from Yemen,” the tweet read.

“Amid all the calls for de-escalation, Iran has now launched an unprecedented attack on the world’s energy supply. There is no evidence the attacks came from Yemen,” the tweet read.

However, Iraq government tweeted that they don’t allow anybody to use their soil to attack neighbours.

“The @IraqiGovt denies media reports that Iraqi territories were used to launch attacks on Saudi oil installations. The @IraqiGovt discharges its constitutional duty to safeguard Iraq’s security and does not permit the use of Iraqi territories to attack neighbouring countries,” the tweet read.

And Iranian Foreign Minister Javed Zarif tweeted that Having failed at "max pressure," @SecPompeo's turning to "max deceit" US & its clients are stuck in Yemen because of illusion that weapon superiority will lead to military victory.

“Blaming Iran won't end disaster. Accepting our April '15 proposal to end war & begin talks may,” his tweet read.

What Happened In 1932?

Detailing the background on Yemen-Saudi tensions in a series of tweets, Chris Murphy, a Democratic Party Senator from Connecticut since 2013, said that the conflict between Saudi Arabia and Yemen roughly dates from the 1932 founding of Saudi Arabia, when the new kingdom took territory from Yemen in a war set off by a border dispute and the latest attack on the Saudi refinery follows a Saudi attack on Dhamar prison which killed 100 people.

Quoting Red Cross, BBC had reported that more than 100 people have died in Yemen after the Saudi-led coalition launched a series of air strikes on a detention centre.

According to the Senator, the Houthis are a group of Shia tribes in northern Yemen who practice a distinct form of Islam called Zaidism and in the 1980s, the Saudis began a campaign to push Sunni Wahabism into Houthi areas, creating massive friction with Houthi communities.

“Saudi Arabia sent Wahhabi settlers into Houthi areas to try to dilute Zaidism and increase Saudi influence in north Yemen. The Houthi resistance to the Saudis, and their patron governments in the Yemeni capital, grew and grew.

In the 2000s, Saudi backed Yemeni governments carried out 6 separate wars against the now rebelling Houthis. Bush opposed most of these wars, believing the anti-Houthi campaigns to be doing more harm than good, especially as the Houthis began to reach out to Iran for help,” the Senator adds.

“In 2015 they (Houthis) successfully marched on the Yemeni capital, Sanaa, and Saudi Arabia and UAE initiated a full-fledged war against the Houthis,” Senator tweets adding that since 2015, there have been atrocities committed by both sides.

How Many Killed Since 2015?

As of November 2018, 6872 civilians had been killed and 10,768 wounded, the majority by Saudi Arabia-led coalition airstrikes, according to the Office of the United Nations High Commissioner for Human Rights (OHCHR).

Global Conflict Tracker states that there are 22.2 million Yemenis in need of assistance, 91,600 killed since 2015 and 2 million are displaced.

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