Abqaiq and eat it too

Published at 12:47 23 Sep 2019 by

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The market remains deeply sceptical as to whether Riyadh’s claim of a ‘full return of oil production by end September’ is credible. Experts claim damage assessment alone should have taken weeks and that spare parts may take months to procure. We believe 2.5–3 mb/d of the 5.7 mb/d of disrupted output has returned as the Khurais field is back online and as spare capacity has been utilised. Still, even accounting for higher output from UAE and Russia, global spare capacity now is just 0.5 mb/d, just as Venezuelan production has taken a step down to below 0.7 mb/d.

Moreover, crude stocks are also tight, having drawn at a phenomenal pace of 1.3 mb/d over the last three months (ex-Iran and Venezuela, the draw rate has been 1.8 mb/d). On a days of forward cover basis, OECD crude stocks are 12.3 days compared to 12.9 days in February 2011.

We do not expect the Saudi disruption to have an immediate impact on the waterborne market, as Aramco will curtail domestic refinery runs, run down 60 mb of domestic crude stocks and buy oil from third parties to supply its customers. Even if Saudi Aramco is able to bring back all of the disrupted output by end-November (as we currently assume), we do not expect full Saudi spare capacity to be restored before sometime next year and we expect Aramco to swap crude quality around from lighter to heavier grades as it struggles to restart Abqaiq. Aramco will continue to buy large volumes of products to fulfil its domestic and foreign obligations, supporting margins. The initial impact will thus be on products markets, as refineries outside the Kingdom run more.

The attacks have also raised geopolitical risk. There are clear consequences for action, but there are also consequences to inaction. The possibility of future attacks now hangs over the market.

Fig 1:Spare capacity as % of global oil demand Fig 2:  Cumulative stockchange, US, ARA, Jap, mb
Source: Energy Aspects Source: Energy Aspects

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