Oil Prices Surge After Attack On Saudi Facility

Oil prices rose sharply on September 16, two days after a September 14 attack on Saudi Arabian processing facilities disrupted the global supply of crude.

A 15% price hike brought oil to its highest level in four months, with U.S. crude jumping by $5.61 per barrel to $60.46, a rise of 10.2%. Brent crude, the international standard, rose by $7.84 to $68.06 per barrel - a 13% jump. Work is already under way to restore production in the attacked Abquaiq plant, but the long-term effects of the drone attack are as yet unclear.

Over the weekend, Saudi officials said that a third of the affected output would be restored on September 16 and that bringing the entire plant back online may take weeks. Experts are not convinced.

"Saudi authorities have claimed to control the fires, but this falls far short of extinguishing them," said Abhishek Kumar, head of analytics at Interfax Energy in London. "The damage to facilities at Abqaiq and Khurais appears to be extensive, and it may be weeks before oil supplies are normalized."

The attack on the Aramco facility may prove to be particularly damaging because of regional tensions between Iran and Saudi Arabia. The US is already highly involved in this drama.

“Saudi Arabia oil supply was attacked,” President Trump wrote on Twitter on September 15. “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!”

The president authorized the use of oil from US emergency reserves if necessary: “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,” he tweeted. “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.”

The fears of geopolitical consequences and possible escalations may keep oil prices trending upward even if the plant goes back online without fundamental changes to the world’s supply of oil.

"Saudi Arabia has been a very reliable supplier of oil in the world," said Jim Burkhard, head of crude oil research at IHS Markit. “This attack is adding a geopolitical premium back into the price of oil.”

Even if the plant goes back online, restoring a full flow 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.

These worries and rising insecurity about the global oil supply may very well be on the horizon, especially if more attacks occur in coming days. A second attack would most likely lead to an even sharper price hike, and Saudi retaliation against Iran’s oil supply could have even more severe effects on the global economy.