Oil May Hit $75 Level If Saudi Outage Prolongs for More Than Six Weeks

Published September 17th, 2019 - 06:30 GMT
Prices are likely to break out of the current $55-65 a barrel options range, to test the high of $70s as currently supported by fundamentals
Prices are likely to break out of the current $55-65 a barrel options range, to test the high of $70s as currently supported by fundamentals. (Shutterstock)
Highlights
Saudi Arabia pumps 9.9 million bpd of which seven million bpd is destined for export.

Oil prices are projected to break above the $55-65 a barrel range witnessed over the last few months, and to hit $75 if outage prolongs, damaging economic growth of major oil-importing countries, as well as impacting their currencies, analysts said.


"Prices are likely to break out of the current $55-65 a barrel options range, to test the high of $70s as currently supported by fundamentals," S&P Global Platts said, after drone attacks on Saudi Arabia's Abqaiq oil processing facility have resulted in the suspension of 5.7 million bpd of the country's oil production.

Goldman Sachs has estimated that Brent could rally above $75 a barrel in case of Saudi outage last for more than six weeks. Newswires reported that Aramco's full normal production may take months after the attacks. Crude prices hit the biggest intra-day jump in 28 years when it rose 20 per cent to reach $72 a barrel at the opening of the trade on Monday. But, later it recovered some of the ground and was trading at $66.26 a barrel on Monday afternoon. It had closed at $60.2 on Friday.

Highlighting different scenarios, analysts at Goldman Sachs said that about week-long outage could push prices up by $3-$5 a barrel, while a disruption of two to six weeks would result in a $5 to $14 per barrel move.

"An extreme net outage of a four million barrels per day for more than three months would likely bring prices above $75 bpd to trigger both large shale supply and demand responses," it said.

According to experts and reports, Riyadh was expected to restore on Monday at least a third of the production lost to weekend attacks on two major oil facilities. Saudi Arabia pumps 9.9 million bpd, almost 10 per cent of global demand, of which seven million bpd is destined for export.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, said that the supply disruption will affect the Kingdom's growth.

"Real GDP growth could be lowered by around 1.2 to 1.4 percentage points under a scenario where it takes one month to fully restore Saudi oil output - assuming a loss of production of 5.7 million bpd for the first two weeks, followed by a smaller loss of 2.5 million bpd in the subsequent two weeks," she added.

Daniel Marc Richards, Mena economist at Emirates NBD Research, said that there are limited options in crude markets to compensate for the disruption to Saudi crude.

"Most of Opec's spare capacity was held in Saudi Arabia itself and while the UAE, Kuwait and Iraq could increase output, their collective increase won't be nearly enough to compensate for the enormous drop in Saudi's production," he said.

Suhail Al Mazrouei, the UAE's energy minister, said the Emirates has spare capacity to deal with possible supply disruptions of oil after attacks on Saudi oil facilities and it was too early to call for an emergency Opec meeting.

"We have spare capacity, there are volumes we can deal with as an instant reaction," Al Mazrouei said on Monday.

Dharmendra Pradhan, India's petroleum minister, said that oil supplied to his country will not be affected.

"We have reviewed our overall supplies for September with Oil Marketing Companies. We are confident that there would be no supply disruption to India," he added.

Fearing wider fiscal deficits, the Indian rupee and emerging countries' currencies fell against the US dollar and the Emirati dirham on Monday. The Indian rupee fell one per cent to 19.5 as compared to 19.3 on Friday. Similarly, the Turkish lira fell 1.3 per cent to 1.56 versus dirham on Monday. But China's yuan was up 0.2 per cent on progress over Beijing-Washington DC trade walks.

"Emerging market FX would be the immediate casualty, especially those affected by large oil import bills, with flight to safety expected to support gold and government bonds," said Taimur Baig, chief economist at DBS Research.


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