The Restoration Surge Brings Us Back to Where We Started . . . Well, Almost

Less than three weeks ago (September 14), news that drone and missile strikes had taken down fully half of Saudi Arabia’s oil production rattled international oil markets. The announcement offset, at least temporarily, overarching concerns over fading economic growth and the expanded threat of a U.S.-China trade war and instead focused global attention on the implications of an extended loss of global spare capacity and the impacts of higher oil prices in the event supply could not be restored quickly. Geopolitically, concerns over heightened tensions throughout the Middle East and the prospects for possible retaliatory strikes aimed at Iran seemed to run headlong into the then-upcoming UN General Assembly and alternating rumors of impending reconciliation and continued antagonism. 

On September 15, following an early assessment of the damage incurred at the giant stabilization and processing facility at Abqaiq and the production trains at Khurais, the Saudi oil ministry announced that 40 percent—representing some 5.7 million barrels per day (mmbd), almost 6 percent of global supply—of the lost production would be restored by Monday, September 16 with the remainder coming back within the next few weeks. In the absence of more detailed news, the nervousness and skepticism of even seasoned oil traders were evidenced in the surge in crude oil prices—to over $68 per barrel—when markets opened on Monday.

Late Tuesday afternoon (September 17), Saudi oil minister Prince Abdulaziz and Aramco CEO Amin Nasser delivered a much-anticipated recovery update. The officials announced that 50 percent of the weekend’s production loss had already been restored, presumably bringing Saudi oil output back to somewhere between 7 and 7.5 mmbd, and that production capacity would return to 11 mmbd at the end of September and to 12 mmbd in November—both viewed as highly ambitious targets.

By this time there was general acceptance that the Houthi rebels in Yemen, who had initially claimed responsibility for the attacks, were not, in fact, the perpetrators, and attention and finger pointing had already shifted toward Iran. Oil liftings continued apace at Ras Tanura, though largely supplied from stock drawdowns, and customers were reassured that volumes would be delivered. Saudi refineries were throttled back to make crude supply available to international customers, and Aramco traders located and purchased refined products to meet domestic demand. In addition, President Trump announced the deployment of additional U.S. troops and missile defense equipment to the Kingdom. By Tuesday evening, oil prices receded and closed at a bit over $64 per barrel.

In the ensuing week, satellite imagery identified a huge influx of equipment and work crews at both Abqaiq and Khurais. Increased gas flaring was recorded at a variety of oil fields and process facilities, surging and declining as repairs were undertaken. In some instances, temporary repairs, as in the instance of the patched spheroids, were deemed adequate to allow processes to come back online. In other cases, longer term replacement and repair will be required. In the interim, Aramco has relied on its vast inventory of producible wells and oil stocks, the flexibility and redundancy built into its system, and the skill of Aramco’s engineers and contractors.

Yesterday, Ibrahim al-Buainain, the CEO of Aramco Trading, told an audience in Fujairah in the United Arab Emirates that Saudi Arabia has restored its production to pre-attack levels. Assuming the country had been producing near 10 mmbd during the first two weeks of September (prior to the attack), were able to restore 7-7.5 mmbd immediately following the attack, and then ramp up output to 9.8 or 9.9 mmbd by September 25, we would estimate Aramco’s monthly production to average well north of 9 mmbd—a fact that will be better known when Organization of Petroleum Exporting Countries’ (OPEC) September figures are released next week. At the same time, Aramco’s production “surge” has also resulted in replenishing depleted inventory, a fact also documented using satellite imagery.

And as a consequence, as we enter the first week of October, bearish macroeconomic and trade concerns have again asserted market prominence, in spite of the fact that the U.S.-Iran-Saudi tensions remain unresolved and poised to evolve in any number of unpredictable and troublesome ways. Oil prices have given back all of their post-attack gains with Brent trading under $58 per barrel today.

Traders and pricing complacency suggest that the oil market remains adequately supplied, though OPEC’s September output is likely to average under 29 mmbd for the month, the lowest level recorded since 2011 and largely the result of the Saudi reductions. U.S. oil output continues to grow but at a clearly slower pace. Trade negotiations between the United States and China are slated to resume later this month, and financial strains, demand reduction, and climate change threaten to unhinge producers in the United States and abroad. Aramco’s most ambitious and capable restoration of sidelined production has been an enviable engineering feat, but the goal of price stability at acceptably high levels continues to be elusive. 

Frank Verrastro is a senior vice president and trustee fellow with the Energy and National Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Guy Caruso is a senior adviser with the CSIS Energy and National Security Program. Andrew Stanley is an associate fellow with the CSIS Energy and National Security Program.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Frank A. Verrastro
Senior Adviser (Non-resident), Energy Security and Climate Change Program
Guy Caruso
Senior Adviser (Non-resident), Energy Security and Climate Change Program

Andrew J. Stanley