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Tanker markets await repair timeline after drone knocks out half of Saudi oil production

The temporary loss of 5.7m barrels a day of oil production will raise oil prices towards $70, but ample reserves will ensure supply security at least in the short term. Prices, however, could move higher if Saudi production is confirmed to be offline for a prolonged period.

Abqaiq is the largest oil processing facility in the world and seen as the nerve centre of the Saudi energy system. Initial reports indicate 15 structures at Abqaiq suffered damage. A report seen by Lloyd’s List suggests repairs could take months.

TANKER markets have been left waiting for a solid indicator of how long Saudi Arabian oil production will be disrupted following the drone strikes on Saturday that has shut down around half the country’s 10m barrel per day oil production.

The drone strikes targetted plants in the heartland of Saudi Arabia’s oil industry, including the Abqaiq processing facility - the largest in the world - and the Khurais field. 

While crude supplies will likely be unaffected in the immediate aftermath of the attack as Saudi switches to reserves to maintain exports, any evidence of prolonged disruption from the world’s top crude exporter would severely test the tightening oil markets and limited spare production capacity able to respond elsewhere.

Initial analyst reports over the weekend suggested a $10 a barrel hike in oil price would be a likely response from the markets when they open Monday as tensions rise in the Middle East. Prices, however, could move significantly higher if Saudi production is confirmed to be curtailed for a more substantial period.

State oil giant Saudi Aramco confirmed that the attack has cut output by 5.7m barrels per day, but it remains unclear how long the oil production shut down will last with various unattributed media reports already claiming the return to full capacity could take several weeks.

The attack on the facility could have significant implications for the oil shipping industry as Abqaiq’s facilities depressurise, desulphurise, and de-gas crude production, rendering it safe for pipeline transport to Saudi Arabia’s east and west coast export terminals.

In the short term Saudi Arabia will be able to maintain exports and use reserves to ensure supply security and the International Energy Agency requires its members to hold stocks equivalent to 90 days' worth of net imports.

“The IEA is monitoring the situation in Saudi Arabia closely,” the agency said in a statement issued on Saturday following the attacks. “We are in contact with the Saudi authorities as well as major producer and consumer nations. For now, markets are well supplied with ample commercial stocks.”

While Yemen’s Houthi group claimed responsibility for Saturday’s attacks, US Secretary of State Mike Pompeo quickly moved to pin the assault on Iran, a Houthi ally.

Mr  Pompeo accused Iran of launching “an unprecedented attack on the world’s energy supply” – an accusation which Iran then described as “deceitful”.

The attack marks a significant escalation in severity after a number of strikes on key oil infrastructure and oil tankers apparently designed to disrupt energy supplies through the supply chokepoint of the Strait of Hormuz. 

"Today’s attack on the Abqaiq processing facility constitutes a paramount oil bullish, equity bearish, and global growth negative risk," said Bob McNally of the Washington DC-based Rapidan Energy Group.

"Such a brazen attack by an Iranian proxy on the crown jewel of the Kingdom of Saudi Arabia's energy system will raise the overall geopolitical risk premium," Mr McNally told Lloyd’s List.

"Due to its complexity, size, and customised components, repairing Abqaiq could take months, depending on the extent of the damage, though workarounds can offset some of the loss," he said.

In a confidential report seen by Lloyd’s List, Mr McNally’s firm stated that "Abqaiq is at the top of the list of any Saudi adversary seeking to inflict maximum damage on the Kingdom’s economic and political stability."

"We assess that Abqaiq’s importance to the global oil market remains underappreciated," said the firm’s report. It said that the market is used to attacks on pipelines in war zones which are "easily repaired" in just hours or days.

But the Rapidan report states flatly that "Abqaiq would be different. Were Abqaiq's stabilisation towers and/or spheroids to be damaged, they could take many months to repair because they are large, uniquely designed, and remote. Obtaining specialised parts would take time."

"The market is likely to quickly realise that Abqaig's stabilisation towers and spheroids would take months to repair, setting off the biggest crisis in the history of the oil market since World War Two," the report states. 

"Once the scale and indefinite duration of damage to Abqaiq was understood, we expect crude oil prices would rise well into triple digits," the Rapidan report said.

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