Brent crude and WTI oil price exhibited range-bound movement during the past month, with Brent crude averaged US$60.2 per barrel, and WTI averaged US$55.7 per barrel. A sudden attack on two Saudi Aramco’s oil facilities on 14 Sep broke the situation and caused short-term supply shock, which led to production suspension of 5.7mbpd according to Saudi Aramco, accounting for ~58%/5.7% of Saudi Arabia’s crude oil output and global crude oil consumption, respectively. After the weekend, the incident pushed up Brent crude by as high as 19.5% to above US$71.95 in early Asia trading session. As the 5.7mbpd supply outage is substantial, we expect oil market will place short-term attention from trade tension and weak demand to supply outage as well as geopolitical events, and questions will be focused on 1) how long will Saudi Aramco to resume those capacity offline; 2) whether geopolitical conflicts will escalate in the Gulf Area; and 3) by what means could major oil producers to sustain short-term demand and to avoid oil price soar in a weak global economic situation. We raise 4Q19 Brent crude and WTI outlook from US$65-70/b to US$70-75/b and raise WTI outlook from US$50-55/b to US$60-65/b respectively. We believe Brent crude can test up to US$80/b depends on Saudi Arabia’s supply recovery pace.
- Half of Saudi oil capacity was knocked out by drone strike. Saudi Arabia‘s two major oil facilities, Abqaiq and Khurais oil field run by Saudi Aramco, suffered coordinated drone attacks on 14 Sep. The attacks sparked a massive fire at major crude processing facilities, forcing the Saudi Arabia to put 5.7mbpd capacity offline according Saudi Aramco’s official statement. According to Bloomberg data, Saudi Arabia had crude oil output of ~9.8mbpd in Aug, which means the 5.7mbpd supply disruption would account for ~58%/5.7% of Saudi’s crude output and global demand respectively.
- The impacts: oil market is likely to face short-term supply shortfall. According to Saudi Aramco, there was no injury in the incident, and work is underway to restore production and a progress update will be provided in around hours (implying an update will be provided on 16 Sep). It is not yet clear that whether if the closure of 5.7mbpd capacity was precaution based, but according to the Financial Times, person close to Saudi’s energy ministry expects it will take weeks to ramp up and bring the complex to maximum capacity. Based on preliminary news information. According EIA and OPEC’s monthly report, global oil supply-demand was close to the range of balance and slight inventory draw of 0.48mbpd. A 5.7mbpd supply outage is significant enough to cause substantial short-term supply shortfall, and that will likely to fuel strong momentum to push oil price upward, despite the fact that Saudi Arabia may have ~2.3mbpd spare capacity and considerable storage to offer some buffer, in our view.
- What come in next? Depending on how long it takes to resume production. Based on a balance market outlook in 3Q19 with OECD inventory of 2,895mb according to EIA, the sudden shortfall represents an inventory draw of 5.7mbpd. If Saudi Aramco’s spare capacity as well as other OPEC countries’ supply growth capacity is considered, we estimate there will still be an inventory draw of ~2.7mbpd. According our estimates, 1) a 4-week supply outage will bring OECD inventory down by 75.6mb to a level close to 1H15; 2) a 10-week supply shortfall will bring OECD inventory back to upper bound level when oil price range bounding around US$100/b in the period of 2010 – 2014; and 3) we expect the longer the supply outage, the higher growth momentum with oil price. Therefore, we expect Saudi Aramco’s progress update will be a short-term key to oil price in the coming few weeks.
