Oil shrugs off new attacks on global energy consumers

Joe McMonigle, secretary general of the International Energy Forum, hit the nail on the head with his reaction to Sunday’s attacks on Saudi Arabian oil facilities by groups backed by the Iranian government.

“Oil export installations, energy infrastructure and international shipping lanes all form a part of the critical foundation that keeps the world economy running smoothly, and any attack on such facilities anywhere in the world is an attack on energy consumers everywhere,” he said.

That’s right - the attacks were an assault not just on the Saudi Aramco production facilities that were their ostensible targets, but also on energy consumers, which means everybody in the world. We all use energy, and oil remains the most important and widely used ingredient of the global energy mix.

The Saudi Ministry of Energy made a similar point in its own statement, when it said the attacks “not only target the Kingdom of Saudi Arabia, but also the security and stability of energy supplies to the world, and therefore the global economy.”

When a similar assault was launched on Aramco facilities in Abqaiq and Khurais in September 2019, it led to the biggest one-day fall in global oil production in history, sharp volatility in the International crude markets, and wild gyrations on the world’s stock exchanges.

Only the rapid and efficient reaction of Saudi Aramco, returning capacity to pre-attack levels in a matter of weeks, prevented those attacks from causing serious and lasting damage to the global economy.

Thankfully, the most recent attacks were unsuccessful in their aim, having apparently been intercepted by the Kingdom’s defense forces. But it is another sinister escalation of the cycle of targeting Saudi energy facilities in a deliberate tactic to cause damage to its economic lifeblood. Ras Tanura, target of one of the attacks, is one of the largest oil refining and shipping ports in the world, and any interruption of business there would have an immediate effect on the Kingdom’s economy.

Especially worrying in the Sunday attacks was the apparent targeting of Aramco residential facilities in Dhahran in Eastern Province by missiles which came from the Arabian Gulf, according to the Ministry of Energy account of the attacks.

Neither attack had any significant effect on lives or livelihoods, but oil analysts immediately rushed to assess what they meant for global crude markets that are only just beginning to recover from the battering they received during the pandemic recession of 2021.

Brent crude spiked above $70 for the first time in 14 months as traders considered the possibility of disruption to global supplies. The price surrendered some of that gain as they decided there was not that much to worry about after all.

The global oil market is in pretty good health, notwithstanding the collapse of 2020, and not least because of Saudi Arabia’s leading role in the OPEC+ alliance of producers.

Last week’s decision by OPEC+ to roll over the supply cuts credited with restoring market balance, led by an extension of the Kingdom’s one million barrel per day voluntary cut, was a sign that there is sufficient oil on global markets to satisfy recovering, but unpredictable, demand.

Refining margins, especially in the Asian markets that are Saudi Arabia’s main focus, are at their lowest for several years, indicating that basic demand is not strong enough to warrant a big increase in output levels.

That time will probably come by late spring or early summer, on the assumption of increasing roll-out of vaccines and ongoing progress in re-opening big economies. There is a lot of spare capacity in global oil markets, not least in Saudi Arabia and the UAE, which can react to any twitch on the demand line very quickly.

With Brent trading around $70 and West Texas Intermediate around $65, there is also scope for some - probably limited - resumption of US shale production when demand recovers.

None of this is to dismiss the serious and sinister nature of the recent attacks, nor the potential for a further escalation of regional tensions. But, for now, the oil market is in a sufficiently comfortable position to shrug off the damage.