Oil prices jump as attack on Saudi plant threatens supply

The loss of 5% of world crude oil output from an attack on Saudi Arabia's largest oil processing plant pushed crude prices sharply higher on Monday.

U.S. crude oil was trading 9% higher while Brent crude added more than 9.4%. The attack on the Saudi Aramco facility halted output of more than half of Saudi Arabia's daily exports.

A picture taken on September 15, 2019 shows an Aramco oil facility near al-Khurj area, just south of the Saudi capital Riyadh. [Photo: AFP]

That's especially worrying for oil thirsty Asia: China, Japan, South Korea and India are major customers for Saudi oil.

"The attacks this time posed a serious threat to key international energy infrastructure, and we express concern that they undermine the energy security of the entire world and stability in the region," South Korea's Foreign Ministry said in a statement.

"We condemn any similar acts," it said.

Oil prices spiked shortly after trading began Monday, with U.S. crude jumping more than 15% and Brent leaping nearly 20%. But the initial surge moderated on talk of tapping strategic reserves to weather any shortfalls from the loss of 5.7 million barrels of crude processing capacity a day.

U.S. crude added $4.79 per barrel, or 8.7%, to $59.63 per barrel in electronic trading on the New York Mercantile Exchange. Brent picked up $5.78 per barrel, or nearly 10%, to $66.04 per barrel.

Yemen's Iran-backed Houthi rebels claimed responsibility for the attack on the Saudi Aramco plant.

"To take Saudi oil production down 50%, that's shocking," said Jonathan Aronson, a research analyst at Cornerstone Macro.

Refiners, who would profit from higher prices, saw their share prices jump, with China's CNOOC up 7.4% and PetroChina gaining 3.5%. Russia's Rosneft's shares gained 3.2% while Australia's Woodside Petroleum ticked up 4.3%. Airline shares declined in anticipation of higher fuel costs.

The attack may add to anxiety about the stability of the world's oil reserves given the tensions rumbling in the region.

"Saudi Arabia has been a very reliable supplier of oil in the world," said Jim Burkhard, who heads crude oil research for IHS Markit. He said the attack added a "geopolitical premium" back into the price of oil.

Oil prices tend to hurt the economy as consumer costs rise, and Asia is the region most vulnerable to big supply disruptions.

Saudi Arabia provides about a fifth of China's crude imports, more than 37% of Japan's and almost a third of South Korea's. Japan is nearly 100% dependent on imports for its oil.

Higher oil prices will increases costs throughout the production chain for East Asian countries that are both export-oriented and dependent on oil imports, said Francis Lun, a Hong Kong-based analyst.

"It will increase the price of everything produced from electronics to medical equipment to food and everything else. And it will hurt the East Asian economies and lower their economic growth," Lun said.

The world's richest countries have oil reserves of more than 2 billion barrels.

According to the Joint Organization Data Initiative, Saudi Arabia has nearly 27 days worth of reserves. It holds reserves at home and in Egypt, Japan and the Netherlands. That can alleviate some concerns.

Meanwhile work was under way to restore production at the Abquaiq plant. The Wall Street Journal reported Sunday that Saudi officials said a third of crude output would be restored by Monday. Bringing the entire plant back online may take weeks. Officials said they would use other facilities and existing stocks to supplant the plant's production.

Chris Midgley, global head of analytics for S&P Global Platts, estimates prices could surge into the "high $70" per barrel range. It could go even higher if disruptions are prolonged, but that is not expected, he said in a research note.

The situation is better today than it would have been a decade ago, thanks to the U.S. energy boom.

The U.S. has a cushion because it and Canada both produce plenty of oil, leaving the U.S. less reliant on the Middle East. But it's still a global market. "If you take oil anywhere out of system it affects everybody," said Burkhard.

Still, even if the plant goes back online and there is no fundamental change to the world's supply of oil, prices may move higher and stay higher because traders would build in a "security premium," said Michael Lynch, president of Strategic Energy & Economic Research.

It would reflect worries that future attacks might jeopardize global oil supplies. And in a world already concerned about supply, the impact of another attack could mean a sharp effect on prices, said Kevin Book, managing director of Clearview Energy Partners. "It's almost like an open season for a big attack."

It's that element of uncertainty that can roil markets.

The attack on its oil infrastructure could lead Saudi Arabia to launch a military strike on Iran in retaliation, Book said. Countries attacking each other’s oil facilities and fields are a "prescription for a high oil price," he said.

Book argues the attack on Saudi Arabia is driving home the repercussions of the unraveling of the Iran nuclear deal after President Donald Trump pulled the U.S. out in 2018, imposing harsh sanctions on Iran, including its oil industry.