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Drone attacks which damaged critical oil production assets in
Saudi Arabia will alter global crude tradeflows. The country's oil
output is estimated to drop by up to 5.7 million b/d, or nearly
half of Saudi Aramco's capacity and about 7% of global production.
The fires were quickly put under control, but recovery after the
damage caused won't prove an easy task. The attack against Abqaiq,
Saudi Arabia's largest oil processing facility, has been without
doubt the largest disruption in history with a massive impact on
oil prices as balances between supply and demand may now turn quite
fragile. Even as clarity around the size of the damage remains
sketchy, the market focus will be on how tight global supply could
turn after this disruption, instead of panicking about world oil
demand growth approaching its weakest levels since 2009. There is
simply no more spare capacity of global oil production left to
secure energy security if geopolitical conflicts escalate.
Since the beginning of 2019, around 6.4 million barrels of Saudi
Arabian crude oil has been imported around the world daily,
according to data from IHS Markit Commodities at Sea.
The majority of these volumes have been absorbed by Asian
importers, with China having imported marginally above 1.2 million
b/d of Saudi Arabian barrels between January and August 2019. China
is heavily relying on Saudi Arabia, which has been supplying around
15% of the country's seaborne imports. However, the exposure of
other importers to Saudi Arabia has been much bigger, with Japan
and South Korea having imported around 38% and 25% respectively of
their requirements between January and August. The big difference
between these two countries and China is that they have been
increasing volumes imported from the US, while most Chinese buyers
have been avoiding US barrels since 2018 Q4, due to the ongoing
trade war between Washington and Beijing.
Countries such as India have also been heavily relying on Middle
Eastern Gulf barrels, with 18% of volumes imported by India since
early 2019 coming from Saudi Arabia. As India is heavily relying on
other exporters near Saudi Arabia, such as Iraq, any further
disruption in the region would cause severe insecurity for the
country. India will probably start looking to import more from
other regions as well, even if price differentials are not that
supportive.
Key Asian importers will have to quickly switch to new
suppliers, if stocks built so far don't prove enough to cover their
thirst for crude oil. The US has been importing around 400,000 b/d
of Saudi Arabian crude oil since the beginning of 2019, with a
significant drop to observe since last year, when levels stood
close to 730,000 b/d on average. This still represents close to 11%
of US seaborne imports, but other suppliers across Latin America
could fill the gap if needed. The shortage in the market might
affect the future of Venezuelan crude oil trade flows, as a
long-lasting tight supply might cause Washington to consider
waivers for specific countries or companies. We could start seeing
more Iranian crude oil imported once again to countries such as
India and China, even against the will of the US.
Other countries that could increase their output include Russia,
Kuwait and the UAE, that have been participating in the OPEC+
production cuts, but this could only add up to a million b/d which
won't be enough to offset the massive Saudi Arabia outage.
Meanwhile, oil inventories held by OECD countries are estimated
to be around 1.5 billion barrels, with no clarity on China's stock,
which is thought to have reached hundreds of millions of barrels,
but with little data published by the government.
IHS Markit Commodities at Sea
tracks floating storage of crude oil, with levels having dropped
during the last month, as prices were previously under severe
pressure. This is a clear negative for quick availability of
volumes.
Overall, Saudi Arabia will continue to export oil like normal
for as long as their inventories of already produced oil will
allow. IHS Markit estimates current levels available for exports or
domestic refining runs to be between 50 and 80 MMbbl.
Posted 16 September 2019 by Fotios Katsoulas, Liquid Bulk Principal Analyst, Maritime & Trade, IHS Markit and
Rahul Kapoor, Vice President, Global Head of Commodity Analytics & Research, Maritime & Trade, IHS Markit