Oil prices rise, then fall, after attack on Saudi Arabia

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Two major Saudi oil facilities were attacked on Saturday. One of the targets was the Abaiq plant, the largest crude oil stabilization facility in the world, while the other was the Khurais field, Saudi Arabia’s second-largest oil field. It has been widely reported that the attack was carried out with drones, although there are reports that cruise missiles were used as well.

The culprit of the attack is unclear at this time. Houthi rebels, who are at war with Saudi Arabia in Yemen and are supported by Iran, have claimed responsibility for the attack. Many have doubted those claims, with US officials denying that the drones/missiles came from Yemen and pinning the blame on Iran itself. Iranian-backed Hashd al-Shaabi (Popular Mobilization Forces) militants in Iraq have also been suggested as being behind the attack.  

On Monday, Iran claimed that it had seized an oil tanker near the Strait of Hormuz, further inflaming an already tense situation. 

The attack has reduced Saudi oil output by 5.7 million barrels per day, making it the largest disruption of oil supplies on record, just ahead of the 5.6 million-barrel reduction caused by the Iranian Revolution in 1979. Unsurprisingly, oil prices spiked in the immediate aftermath of the attack, with the price of crude increasing by about 20 percent globally and more than 15 percent in the U.S. However, prices dropped by 6 percent on Tuesday after reports that lost Saudi output would come back online sooner than previously thought.

While the rest of the world has reason to fear an oil disruption and is surely breathing a sigh of relief after the recent price reduction, things are different for the oil-producing state of Texas. “Put simply, higher oil prices generate more royalty revenue for state run entities (like universities) as well as for the state of Texas,” says Tracy Krohn, founder and CEO of W&T Offshore. “Texas clearly benefits from any run up in prices”.

However, this does not apply to the rest of the country. “[While] the U.S. is currently the largest producer in the world, it does not yet enjoy energy independence in that it consumes more oil than it produces by around 5 million barrels per day equivalent” adds Krohn. “”Thus, at continued losses coming from Saudi [Arabia], we still need to scramble a bit to make up the loss of their oil being imported to the U.S.”

President Trump has authorized the release of oil from the Strategic Petroleum Reserve. However, Secretary of Energy and former Texas governor Rick Perry has stated that it is premature to determine whether this is needed. 

However, oil prices could go back up and then some if the situation deteriorates. Krohn says that another such event in the Persian Gulf would “really rattle the markets.”

Saudi Arabia possesses British-supplied Storm Shadow cruise missiles and Chinese-made DF-21 ballistic missiles that could be used to retaliate against Iran. President Trump has also stated that the U.S. is “locked and loaded” and waiting for verification of who was responsible. 

If the U.S. and/or Saudi Arabia decides to take military action against Iran, it could easily escalate in a tit-for-tat exchange. The Iranians have a large arsenal of cruise and ballistic missiles as well as proxy forces that could be used in response to a Saudi/U.S. strike, possibly hitting more oil facilities and further disrupting the market. In an extreme case, Iran could completely shut down the Strait of Hormuz with anti-ship missiles, naval mines and small attack boats, although it is unclear whether Tehran would be willing to take such drastic action.

Photo: NASA Worldview

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