Does oil really matter? If the answer is yes, then the other question is to what extent.

Markets reacted violently to the loss of some 5.7 million barrels per day (bpd) from the global crude supplies, following the ‘drones’ attack on Abqaiq plant and the second-largest Saudi oil field Khurais.

Abqaiq is crucially important to Saudi crude exports. It is the world’s largest oil processing facility and crude oil stabilisation plant, with a capacity of more than 7m bpd. The process is a form of partial distillation, to sweeten the ‘sour’ crude, by removing hydrogen sulfide. The process also reduces vapour pressure, making the crude oil fit and safe for shipments.

The other target of the attack, the Khurais oil field — some 150km northeast of Riyadh — produces roughly about 1.5m barrels of crude per day.

Consequently, oil markets experienced the largest supply disruption in more than 50 years. Markets were tormented, registering the biggest-ever surge in oil prices, before sliding back somewhat. West Texas Intermediate crude briefly rose more than 11 per cent last Monday, to above $60 a barrel, while Brent too registered the single biggest intraday trading gain in history.

Yet the interesting aspect of the price movement was that it seemed less than proportionate to the attack. The attacks resulted in the sudden loss of 5.7m barrels of oil a day, more than the 4.3m bpd lost during the 1990 Gulf War or the 5.6m bpd during the 1979 Islamic Revolution. Yet, as compared to those two events, the reaction of the market this time was minimal.

Crude fortunes have definitely changed over the last decade or so. But to be fair, losing such a large amount of production in an $84.8 trillion global economy isn’t the same as when the economy was just $37.9tr in 1990 or $27.4tr in 1979, a Bloomberg report underlined.

Also supplies today are ample and diversified. Replacing the outage was difficult; yes, but not impossible.

Various options were on the table. At a point in time, US President Donald Trump appeared evaluating the need to release oil from the Strategic Petroleum Reserves. Fatih Birol, the executive director of the International Energy Agency underlined the global oil market remained well supplied, adding its members held about 1.55 billion barrels of emergency oil stocks — more than enough to offset any supply disruption.

The US shale revolution too had a role to play. The world today is not totally ‘crude’ dependent on the Middle East. The US is now a net exporter and the world is no more that desperate for oil, as it was in the 70s or the 90s. As Julian Lee points out, it was just a few days ago that the Organisation of the Petroleum Exporting Countries (Opec) and its allies were bemoaning the excessive inventories still sloshing around the world after more than two and a half years of supply restrictions.

With the outage, that scenario didn’t change drastically.

A US Energy Information Administration report also showed domestic oil inventories rising by 1.06m barrels last week. Gasoline stockpiles also went up by 781,000 barrels, while distillate supplies increased 437,000 barrels.

And then bringing back Iranian supplies, in case really required, was also an option. With the Trump administration tightening screws on Iranian crude exports, there is always a possibility of loosening of sanctions so as to increase supplies and stabilise the markets, if absolutely required.

And thus, despite the insistence of hawks in the administration, including Secretary Mike Pompeo, the Saudi outage has also resulted in reducing the prospect of a war in the region. After all with the elections approaching, Trump could not have afforded rising prices at the next door gas station. He needs to ensure price stability. In the wake of the Saudi outage, he may have needed Iranian crude. He thus stepped back. After making the initial statement; the US stands ‘locked and loaded’ President Trump retreated, tweeting he has ordered the Treasury Department to “substantially increase” sanctions on Iran. The comment from the president, underlining he’s in no rush to respond to the coordinated attack, marked a softening in his rhetoric.

Yet the drone attacks also indicate; the Saudi oil infrastructure is not immune to such attacks. At a point in time, with the US-Iran conflict growing, it was felt Iran had the capacity to block or at least impede the flow of crude from the Persian Gulf by blocking the Straits of Hormuz. It now seems Tehran has other options too.

And the attacks are also impacting the prospects of an early Saudi Aramco IPO which Prince Mohammad bin Salman so desperately wants.

Published in Dawn, September 22nd, 2019