• Friday, March 29, 2024
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Drone attacks on Saudi Arabia heighten geopolitical risks facing oil

Saudi Arabia-oil attack

A series of coordinated drone attacks on Saudi Arabian oil facilities, among the world’s largest and most important energy production centres, has not only disrupted the kingdom’s capacity by half but raises new geopolitical risks for crude oil, one missed by global risk analysts.

Eurasia Group, a respected political risk research and consulting firm founded in 1998 by Ian Bremmer, published a comprehensive list of risks facing the world in 2019 but missed attacks on the world’s most stable oil producer.

“The Saudi Crown Prince has made many enemies in recent years but he’s not going anywhere, and neither he nor the kingdom he will lead faces serious risks in 2019,” writes Ian Bremmer in his risk analysis for Saudi Arabia.

On Iran, the risk firm which has offices in New York City, Washington, DC, London, Tokyo, São Paulo, San Francisco and Brasilia, said the country’s need to endure US sanctions by protecting relations with Europe will “limit the aggressiveness of its foreign policy, as it keeps its head down and tries to run out the clock on the Trump administration”.

But Iran is not backing down. Mike Pompeo, US Secretary of State, has blamed the drone attacks on Iran.

“Tehran is behind nearly 100 attacks on Saudi Arabia while Rouhani and Zarif pretend to engage in diplomacy. Amid all the calls for de-escalation, Iran has now launched an unprecedented attack on the world’s energy supply. There is no evidence the attacks came from Yemen,” Pompeo said on Twitter.

Analysts at JP Morgan Chase in their risk forecasts said US sanctions on Iran could trigger oil supply shock that Saudi cannot offset in the short term, pushing Brent towards $100 per barrel. Yemeni rebels were not factored to cause a major upset.

This drone strike will not only heighten tensions in the Persian Gulf adding to the geopolitical risks from the confrontation between the United States and Iran over a disagreement with a nuclear pact it had with world powers, it could unsettle oil markets.

Abdulaziz bin Salman bin Abdulaziz, Saudi Arabia’s minister of energy, has said the attacks knocked out 5.7 million barrels of oil per day (bpd) and has led to the cessation of the production of associated gas estimated at (2) billion cubic feet per day, used to produce 700,000 barrels of natural gas liquids.

“Part of the decline will be compensated for its customers through stocks,” the Saudi oil minister explained in a press release.

Saudi Arabia is one of the biggest oil producers in the world and is often seen as swing producer helping to rebalance oil markets. It holds millions of barrels in tanks inside the kingdom as well as in the Netherlands, Japan, and Egypt. But these reserves could run out in a matter of weeks.

Jason Bordoff, founding director of the Center on Global Energy Policy at Columbia University, said in a statement that if the disruption in Saudi Arabia is prolonged, “sanctioned Iran supplies are another source of potential additional oil, but [US President Donald] Trump has already shown he is willing to pursue a maximum pressure campaign even when oil prices spike. If anything, the risk of tit-for-tat regional escalation that pushes oil prices even higher has gone up significantly.”

Rick Perry, United States energy secretary, says the country “stands ready” to tap its Strategic Petroleum Reserve to steady oil markets if necessary.

The US has emergency oil supply in storage tanks and underground caverns created after the oil crises of the 1970s and holds about 630 million barrels of crude, according to the country’s Energy Department.

But an oil market that has become so volatile that even tweets of the US president can upend prices will react strongly to an attack that took out about 17 percent of global oil production.
Though Saudi Arabia has the capacity to produce 10.3 million barrels a day (bpd), it is keeping oil exports below 7 million bpd in September by allocating less crude than customers demand to stabilise the market.

Oil markets are expected to react to this crisis as they have always been susceptible to geopolitical risks, especially from the Middle East. The decision to boycott America and punish the west for their support to Israel in the Yom Kippur war against Egypt led the price of crude to rise from $3 per barrel to $12 by 1974.

Analysts do not see this attack leading to a 1970s-style price hike, but it could lead to temporary spike.

“Taking out 5 million bpd is a lot, this will definitely impact oil prices,” said Ayodele Oni, energy lawyer and partner at Bloomfield Law firm.

Oil markets will awaken to the shock on Monday as one of the world’s major oil facilities that processes sour crude oil into sweet crude then transports them onto transshipment points on the Persian Gulf and the Red Sea goes offline. It is still dealing with attacks on oil tankers along the Strait of Hormuz by Iran and threat of militancy in Nigeria’s Delta region and insurgency in Libya.

 

ISAAC ANYAOGU