The sophisticated attack on Abqaiq and Khurais
in Saudi Arabia on September 14 was unprecedented. It caused the single largest daily volumetric disruption to the oil market in history. While oil prices surged significantly on September 16, with Brent posting a near $9 dollar gain for the day, half of those gains reverted by September 17. Brent now stands less than $5 above where it was on Friday of last week before the attacks occurred.
Despite the scale of the disruption, the oil price surge on Monday ranks as only the fourth largest relative daily movement in Brent prices since the contract’s inception in 1987 (see chart below). With more information now available on the severity of the damage to Saudi oil infrastructure and with Saudi Arabia assuring the market that supply levels will not be affected while restoration work occurs (by drawing down stocks and increasing production from elsewhere), prices have fallen.
It is a testament of the state of the current market mindset that one of the largest disruptions ever, which has temporarily wiped out more than half of the world’s spare capacity, has barely kept prices 5 percent higher. Demand has been very weak, shale is still growing, the Organization of Petroleum Exporting Countries-plus (OPEC+) has been cutting, and Iranian supply is held offline. And although commercial petroleum stocks have declined in recent weeks and U.S. shale growth is showing some signs of a slowdown
, the market seems relatively confident that there is still enough supply to meet current levels of demand.
Whether the market is right, as always, is another question. Things have the potential to change quickly here, especially in the absence of any diplomatic intervention on Iran. Under the current impasse
, geopolitical tensions in the Middle East will continue to increase and with it, the possibility of miscalculation, conflict, and additional supply disruptions at a time when global spare production capacity is now running dangerously thin.