Saturday’s drone attacks on Saudi Arabia's Abqaiq processing facility and Khurais oil field have affected world oil markets as Brent crude posted its biggest ever intraday jump, briefly surging above US$71/bbl this morning.

According to reports, the attacks forced Saudi Aramco to shut in 5.7 bbls/d of crude production, which equates to about seven per cent of the current global crude and condensate production. Abqaiq and Khurais are main processing centres for Saudi Arabia's Arab Extra Light and Arab Light crude oil.

The following is a sample of views from various analysts regarding the near-term impact the squeeze in output could have.

CIBC Capital Markets

In a note this morning, CIBC Capital Markets analysts Jon Morrison said global crude futures have ascended by about US$6-$8/bbl.

“Whether prices trend towards a double-digit price increase or check back will be a function of Saudi Arabia’s messaging on the extent of the damages and expected duration of the outages at its official communication that should come today,” he said.

“Either way look for energy equities to move higher and continue the ascent we have seen for the past week as near-term industry cash flows will move higher on the back of the event. This is also likely to result in some return to beta and value oil stocks continuing to catch a strong bid.”

With that said, CIBC said this is “unlikely to result in any major increase” in capital spending/activity plans within North America as producers are in the early days of proving their new-found religion on spending restraint.

CIBC said the event also has some additional cascading effects, including a further souring in U.S. and Iranian relations and rising geopolitical risk in the Middle East, which “should support a higher oil price independent of the actual fundamental impact” the outage will have on the physical crude markets and global inventories.

“The latter of which really won’t be able to be properly assessed until additional information is received from within Saudi in the coming days,” Morrison said.

Rystad Energy

In an update to clients after the biggest attack on oil infrastructure since the Gulf War, Bjørnar Tonhaugen, head of oil market research at Rystad Energy, made the following remarks:

“The bullish reaction in oil prices will likely be limited by Saudi Arabia’s vast quantities of crude in storage, estimated to equal roughly 26 days of current crude exports, a large portion of which is at the main export terminal Ras Tanura. The country also has strategic storage facilities in Rotterdam, Okinawa and Sidi Kerir [Egypt],” Tonhaugen said.

“The world is not even close to being able to replace more than five million bbls/d of Saudi Arabian exports. The market’s reaction to Saudi Arabia’s importance, in the new era of U.S. shale, will now be put to the test.”

The longer the processing facility remains disrupted, the larger the potential impact on actual crude flows will be.

“In a scenario where the damages result in a longer duration of the 5.7 million bbls/d production shut-in, say for 10 days or more, the situation for Saudi Arabian crude flows to the market will be critical, in our view, as there are limits globally to the volume of export replacement barrels,” Tonhaugen said.

“Strategic Petroleum Reserves in the OECD countries would then be called upon. The U.S. stands as one of the few countries that would be able to increase exports in the short term.”

Rystad said it believes U.S. crude exports could potentially be increased by about one million bbls/d, from three million to four million bbls/d, if prices allow for higher utilization of the current crude exports capacity. Other countries with available capacity to increase exports by a few hundred thousand bbls/d each include UAE, Russia, Kuwait and Iraq.”

Tudor Pickering Holt & Co.

The fact that about five to six million bbls/d of production can be taken off the market in “the blink of an eye should not be discounted” as it continues to highlight the amount of global production that is concentrated in regions of the world that are facing ongoing conflict, said Tudor Pickering Holt & Co.

“To put this into context, there is currently about 20 per cent of global liquids flowing through the Strait of Hormuz which could remain an ongoing source of risk, though Saudi Arabia has accelerated alternative options via the East-West pipeline system,” the firm said.

“Specific to Saturday’s attacks, media reports indicate that production could be back online in the next 24 hours, but the market is likely to price some risk premium into the forward curve amid uncertainty around potential escalation of Saudi Arabia/U.S.-Iran conflict as media reports appear to link previously thought of drone attacks to cruise missiles from Iran.”

The firm said its primary concern in 2020 remains the fundamental market imbalance with liquids oversupply of about 800,000 bbls/d, which assumes Iran remains sanctioned through 2020 and the majority of incremental supply comes from the U.S., Brazil, and Norway.

“While duration of the shut-ins is unknown, we estimate total disruption to be ~10-15 million bbls assuming full restoration by Tuesday, but could be higher if impact is worse than expected,” said Tudor Pickering Holt.

“We will be closely monitoring any official announcements from the Saudi Ministry and the timeline of production returning to normal levels.”

The firm is expecting strong performance “across the entire energy complex” Monday, and upstream should see some of the biggest gains as the increase in crude price will immediately flow through to improved cash flow. Currently, company’s models are running US$55 WTI and US$61 Brent in 2020.

Among oilsands and integrated producers, Tudor Pickering Holt analysts said a rally in crude prices should lead to outperformance in MEG Energy Corp., Canadian Natural Resources Limited and Cenovus Energy Inc. versus more integrated producers such as Suncor Energy Inc. and Husky Energy Inc., “though a rising tide is likely to lift all boats.”

Wood Mackenzie

Wood Mackenzie research director Vima Jayabalan said the impact and the next course of action will depend on the duration of the outage.

“Saudi Arabia has enough reserves to cover the shortfall over the next week, but if the outage extends, then filling the gap with the right type of crude quality could be a challenge. Moreover, OPEC+ output cut predominantly consists of medium and heavy sour crudes,” he said.

“In terms of refining and petrochemicals, the spike in crude oil prices will dent margins further. A prolonged outage and/or further upside above-ground risks in the near term could have an impact on the preparation ahead of the IMO marine bunker specifications change, but at the moment it is still early days to assess.”

Collectively, Jayabalan said Asian demand for Saudi Arabian crude is around five million bbls/d — accounting for almost 72 per cent of Saudi Arabia's crude exports. Asian consumption of Arab Extra Light and Arab Light grades alone from the affected facilities varies between 2.5 and 2.7 million bbls/d seasonally.

“The region's dependence has increased significantly over the last 1.5 years,” Jayabalan said.

S&P Global Platts

S&P Global Platts said the attacks on Saudi Arabia's pivotal Abqaiq processing facility and Khurais oil field have raised questions over the kingdom's — and also the world's — security of crude supply.

"The events in Saudi Arabia have ratcheted up tensions in the Middle East to a new level raising concerns about supply security,” said Chris Midgley, the firm’s global head of analytics.

“While in the short term the direct physical impact on the market might be limited, this should move the market away from its bearish macroeconomic cycle and raise the risk premium in the market as funds reduce their short positions.”

Midgley added that while some commentators may call for triple digit oil prices S&P Global Platts would suggest that the sudden change in geopolitical risk warrants not only an elimination of the $5-$10/bbl discount on bearish sentiment, but adds a potential $5-$10/bbl premium to account for “now-undeniably high” Middle Eastern dangers to supply and the sudden elimination of spare capacity.

“As such, prices are likely to break out of the current $55-$65/bbl options range, to test the high $70s as currently supported by fundamentals,” he said.

“Price could move higher if Saudi production is confirmed to be curtailed for a more substantial period which is not our current assumption.”