Oil prices jump on Saudi attack, but if fuel follows it's 'certainly price gouging'
Oil prices are up 12 per cent, potentially driving petrol prices higher, following an attack that has knocked out about half of Saudi Arabia’s crude processing.
- Analysts expect the benchmark Brent crude price to jump from around $US62/barrel to around $US70/barrel
- About 6 per cent of global oil supply has been knocked out by drone attacks on Saudi Arabian facilities
- Analysts say Saudi Arabia will likely use domestic stockpiles to maintain supply in the short term
On Saturday, a drone attack severely damaged the Abqaiq oil processing facility as well as targeting the Khurais oil fields in Saudi Arabia.
Saudi Aramco has reportedly shut down around 5.7 million barrels per day of production capacity as a result of the attacks, which is more than 6 per cent of global supply, according to ANZ analysts.
ANZ commodity strategists Daniel Hynes and Soni Kumari said that Saudi Arabia is likely to maintain exports by drawing on domestic stockpiles in the short term, however oil prices will rise significantly due to worries about medium-term supplies.
“We expect the market to quickly price in a sizeable geopolitical risk premium,” they wrote.
“Any expectation that the market had about the US easing sanctions on Iran following President Trump’s dismissal of John Bolton will quickly dissipate.
“This should see Brent crude test the $US70 per barrel mark in the short term. Any further upside will depend on the length of the disruption.”
That prediction looks close to the money, with Brent crude futures prices jumping around 20 per cent once trade resumed early on Monday to $US71.95 a barrel, before settling somewhat to be 11.6 per cent higher at $US67.19 a barrel by 11:50am (AEST).
Brent crude futures had been trading around $US60 a barrel on Friday.
Rabobank’s senior Asia-Pacific strategist Michael Every said it is the biggest intraday surge in crude prices since 1991, during the first Gulf War.
Motorists could see 8c/litre price jump
CommSec chief economist Craig James said there is a direct correlation between global oil prices and Australian petrol and diesel prices.
“Every US dollar per barrel increase in the price of oil is basically a cent at the Australian petrol bowser,” he told ABC News.
However, Mr James said those price impacts should not be felt by local motorists for at least a couple of weeks.
“It takes around about two to three weeks for the [oil] price to come through to the bowser price.”
Mr James said that any service stations that increased their prices significantly today “certainly would be price gouging”.
In fact, Mr James said that there may not be too much effect on local fuel prices at all if the outage is short lived, and given that both Saudi Arabia and the US have committed to releasing some of their oil stockpiles if needed.
“It may be the case that they’re able to get back to [full] production quickly, which means it’s not going to have any impact in terms of the Australian pump price,” he added.
Energy and Emissions Reduction Minister Angus Taylor said any impact to Australian fuel prices would be “minimal”, adding there was no immediate threat to Australia’s supplies.
“I’m not going to predict prices, but the expectation at the moment is that production will come back on reasonably quickly and we have good stocks around the world,” Mr Taylor told the ABC’s AM program.
“Oil disruption and disruption of this sort is typically global, and that’s why the IEA [International Energy Agency] is focused on having global stocks in place. We have those, the IEA has informed us of that.”
The price of risk returns to oil
However, energy analysts are less sanguine about the future price implications.
“This attack has material implications for the oil market, as a loss of 5 million barrels per day of supplies from Saudi Arabia cannot be met for long by existing inventories and the limited spare capacity of the other OPEC+ group members,” wrote Wood Mackenzie’s vice-president for refining, Alan Gelder.
“A geopolitical risk premium will return to the oil price.”
Rabobank’s Michael Every agreed that he cannot see crude oil prices falling back down to pre-attack levels in the short term.
“The crown jewel of the Saudi oil industry has just been shown to be highly vulnerable to attacks that might have been carried out by low-cost, low-tech drones that will be almost impossible to prevent from occurring again,” he wrote.
“Against this backdrop there is surely going to be a higher geopolitical risk premium built into the entire Middle East oil complex until matters are properly resolved.”
ANZ analysts said that risk premiums in oil markets had been declining since a price spike in the fourth quarter last year after the US placed wide-ranging sanctions on Iran in September 2018.
Oil prices rose into the mid-$US80 range late last year.
“We feel the market has not fully appreciated the risks to supply; which is understandable considering the noise created by the US-China trade conflict,” the ANZ analysts noted.
“This latest event should see market focus turn back to supply-side issues.”