Saudi oil production under attack

• Saudi Arabia has temporarily lost 5.7mb/d of oil output following drone attacks on Saturday.

• This amounts to 5% of world output and is a significant blow to the oil market.

• Reports suggest Saudis can recover a large part of the lost oil within days, but may need weeks to return to full capacity.

The world's biggest crude production facility in Abqaiq and Saudi Arabia's second-biggest production facility in Khurais suffered drone attacks on Saturday. Consequently, Saudi Arabia has temporarily lost 5.7mb/d of crude output. Reports suggest that Saudi Aramco, the state oil company, can resume a significant part of the lost production volume within days, but may need weeks to return to full capacity.

Albeit likely only temporarily, the oil market will struggle to cope with a 5% output loss. Most of Saudi Arabia's crude exports go to the US, China, Japan and South Korea. All four countries hold significant strategic oil reserves, which can fill a temporary gap in crude supplies. On a global scale, we expect weak demand, due to slowing economic growth and the ramifications of the trade war, will act as a mitigating factor. Recently, OPEC+ voiced concerns about a growing oil supply surplus.

The output loss amounts to around 5% of total world crude output. Even if it turns out to be only a temporary output loss, we see it as a significant blow to the oil market in several ways. Firstly, the oil market is used to output disruptions, but nothing of the magnitude witnessed in Saudi Arabia over the weekend. For example, disruptions in Libya due to rebel attacks are normally 200-300kb/d. Secondly, Saudi Arabia normally holds some spare production capacity, which it can deploy when output is disrupted elsewhere in the oil market. The market knows this, which means it tends not to overreact to supply disruptions. After this weekend, the market may be more hesitant in trusting this self-stabilising mechanism. Thirdly, the market is used to geopolitical tensions in the Middle East. Besides the effect of outside sanctions, it is rare that they affect oil production. The oil market may become more averse to geopolitical news going forward.

Over the coming days, we expect the market to focus on the immediate impact on Saudi Arabia's oil production and geopolitical tensions in the region. This will set the direction for oil prices. However, over the coming months, we will keep an eye on whether this weekend's attack has implications for OPEC+, which is set to meet again on 5 December. Saudi Arabia has been overly compliant in adhering to its part of the OPEC+ deal to cut oil production. It may be less willing to continue this position.

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