The oil price spike caused by a drone attack on a major Saudi processing facility will provide a welcome − but short-lived − boost to North Sea revenues, a prominent petroleum economist has said.
UK operators take a “long-term view” and won’t make investment decisions on new projects based on a price increase of a few dollars, said Aberdeen University professor Alex Kemp.
But Prof Kemp did say the markets could become “inflamed” for longer if the US decided to retaliate against Iran, which Washington holds responsible for the assault.
Iran-backed Houthi rebels in Yemen claimed credit for the air strike.
Prof Kemp added that events in Saudi Arabia showed how vulnerable oil installations were to drones, and warned that other militants could get “ideas”.
The attack stripped the market of 5.7 million barrels of oil per day, which equates to about 5% of global demand.
Brent crude, the global benchmark, skyrocketed by about 20% to $71.95 per barrel yesterday morning − the biggest gain in percentage terms since 1991.
Prices cooled off as the day wore on, with the global benchmark trading 8.6% higher at $65.40 per barrel in the afternoon.
Brent is trading at around $67.49 per barrel this morning.
Prof Kemp said the loss of such large volumes was always likely to “shock” the market.
But he wasn’t surprised some of the early price gains had been handed back.
The market is “quite well supplied”, with vast Saudi oil reserves held in storage at various global centres.
And while no one can cover a 5.7m barrel shortfall alone, other countries such as Russia, the UAE and Kuwait do have spare capacity which could offset some of the impact.
Opec and its allies reduced production by 1.2m barrels from the start of this year in a bid to support prices, but those cuts cannot be fully reversed, as Saudi Arabia was fulfilling a large chunk of that quota.
The US also has significant reserves at its disposal, which could be released.
Prof Kemp said the longevity of any effects on the market depended partly on how long it takes to fix the Abqaiq facility.
“The longer it takes to repair, the longer the price will stay up,” he said, adding: “The impact on oil prices is not going to be dramatic. We’re not going to get $100 per barrel or anything like that.”
Prof Kemp compared the supply disruption in Saudi Arabia to the loss of oil when Iraq, led by Saddam Hussein, invaded Kuwait in August 1990.
He recalled that the oil price rose sharply, but had dropped all the way back down within six months.
Prof Kemp believes the crude price spike in the aftermath of the drone attack could be completely eroded in the coming weeks.
“If nothing else happens, this will be a blip lasting weeks rather than months or years,” he said. “The increase will be there because of the shock effect, but when you look at fundamentals, the supply and demand balance is such that the market is well supplied.”
Prof Kemp’s colleague, Marc Gronwald, senior lecturer in energy economics at Aberdeen University, agreed that an escalation of the situation or military action would certainly drive oil prices further up.
Alan Gelder, vice-president for refining, chemicals and oil markets at Wood Mackenzie, said: “This attack has material implications for the oil market, as a loss of 5 million barrels per day of supplies from Saudi Arabia cannot be met for long by existing inventories and the limited spare capacity of the other OPEC+ group members.
“A geopolitical risk premium will return to the oil price.”
Bjornar Tonhaugen, head of oil market research at Rystad Energy, said: “The global flow of crude oil will not be disrupted immediately due to storage capacity at the main export terminals.
“However, the longer the processing facility remains disrupted, the larger the potential impact on actual crude flows will be.”
Will Scargill, managing oil and gas analyst at GlobalData, said: “If the Saudi supply outage is sustained, we may well see a test of how well the US industry can dynamically adapt to market needs.
“Although the OPEC+ production cuts currently in place mean that the group has spare capacity available, it may not be enough to cover all lost output.”
Callum Macpherson, head of commodities at Investec, said: “However quickly (or not) Saudi Arabia brings production back on line, this incident raises profound questions over Saudi Arabia’s role as the world’s reliable swing producer.
“Usually when there is a disruption somewhere in the world, we ask how much spare capacity Saudi has and how quickly it can be brought on line – now it is Saudi Arabia that is the problem and the volumes are so large that nobody else can cover the shortfall.
“And if this can happen once, presumably it can happen again. This is bad news for OPEC generally as much of OPEC’s credibility rests on Saudi Arabia.”