This past Saturday the Abqaiq processing facility and the Khurais oil field suffered a series of coordinated drone attacks. Here’s what we know now and the potential impacts to our clients:
- The Abqaiq processing facility has a capacity of 7 million bpd and is the nexus point where crude oil streams from the field are processed into export grade crudes. These are not refineries (i.e. they don’t make finished products like gasoline and diesel), rather they desulfurize and process crude oil to meet export specifications.
- The Khurais oil field has a production capacity of 1.5 million bpd. Several of its crude oil processing trains were hit as well.
- In a statement, Saudi Aramco said much of the shutdown was automatic and precautionary.
- Market reports hypothesize that Saudi oil production could fall by 50%. This is roughly 5% of world supply.
- Crude oil prices rose substantially Saturday and Sunday and have moderated a bit today.
Immediately after the attacks, industry voices began speculating that the long term price impact might be negligible or could exceed $30 per barrel. This wide range of views reflects the lack of information and the desire to get a forecast out immediately. In the case of market disruption events, crude oil price is overwhelmingly driven by uncertainty. The United States and others pledged to draw down oil stocks if needed – statements like these reduce uncertainty. Statements about retaliation increase uncertainty. Until repair crews can ascertain the extent of the damage, the market will remain volatile and prone to additional gyrations on market news. Importantly, now that the market knows this kind of attack can occur, additional volatility will remain priced into crude oil markets for the foreseeable future.
For our clients, the impacts are already being felt in two broad categories:
- Companies that benefit from higher oil prices – E&P, midstream, oil field services, etc. typically benefit from higher prices. However, it’s not the spike that resonates, it’s the impact further down the price curve. Like most market shocks, the increase in the October 2019 crude oil future contract is more than double the impact in future months. If the problems in Saudi Arabia persist, the entire crude oil price strip will rise, impacting investment decisions at these companies as well as at energy private capital firms. In the short term, there may be some hedging opportunities to lock in higher pricing for near month production before higher operating costs work their way through the system.
- Companies that are hurt by higher oil prices – Any firms that use oil or oil products will feel the immediate impact on their unhedged needs. Prices, especially at the retail level, move up quickly when crude oil price increases. And, when crude oil price decreases, they decrease more slowly. Taken together, the biggest immediate impact may be felt in companies with large fleets of vehicles and airplanes and the services that they deliver. That’s a very short sentence but it describes how much of the US GDP get delivered given the heavy reliance on these transportation providers. We expect that companies with large fleets will increase their hedging activity while uncertainty remains high. The more lasting impacts may be felt down the value chain as higher transportation costs impact a wide range of companies.
When faced with oil price gyrations, our clients often encounter challenges in several areas. Most immediately, more levered E&Ps and midstreams look at the opportunity to hedge exposure. These firms need to figure out not just what to hedge, but how to do it. Higher volatility means a more challenging market where hedge providers’ breadth gives them an advantage. And, any changes in hedge positions have balance sheet impacts as well. Firms with near term debt maturities should be looking very closely at how locking in higher prices improves their capital structure. Finally, the reverberations of this event will also be felt in the insurance and construction space as they work out how to harden existing energy infrastructure not only in the Middle East but around the world.
Brian Spector, Chief Development Officer – Sirius Solutions LLLP
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