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India staring at a price flare-up after drone attack on Saudi oil facility

image Smoke is seen following a fire at Aramco facility in the eastern city of Abqaiq, Saudi Arabia, on September 14, 2019. - REUTERS



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News reports that say “Saudi Arabia is shutting down half of its oil production after drones attacked the world’s largest oil processing facility in the Kingdom” are worrisome for large oil consumers such as India, as they could lead to a spike in prices.

The Kingdom is one of the main suppliers of crude oil for Indian refiners and any such geopolitical development has immediate impact on prices. Not only does it affect the fiscal math of the buyers but the country as well.

Kabir Taneja, Associate Fellow, Observer Research Foundation, said: “Saturday’s attacks have reportedly affected 5 million barrels per day of oil production from Abqaiq. These attacks could push up oil prices significantly, causing stress to an already volatile economy in India.”

While supply would resume — such disruptions have been observed before in case of both the Gulf wars — oil price fluctuation is the main concern here, he added. “If such attacks become frequent, and ways to mitigate (such) crude drone strikes shuttering multi-billion dollar facilities are not brought in urgently in Saudi Arabia, energy consumers in import-heavy countries like India could face the brunt,” Taneja cautioned.

Early Saturday, an oilfield operated by Saudi Aramco was attacked by a number of drones, which sparked a huge fire at a processor crucial to global energy supplies.

On Sunday, in an official statement, Aramco said that “Saudi Aramco emergency crews contained fires at its plants in Abqaiq and Khurais, as a result of terrorist attacks with projectiles. These attacks resulted in production suspension of 5.7 million barrels of crude oil per day.”

After visiting the incident locations, Amin H Nasser, Saudi Aramco President & CEO, said: “We are gratified that there were no injuries. I would like to thank all teams that responded timely to the incidents and brought the situation under control. Work is under way to restore production and a progress update will be provided in around 48 hours.”

India’s biggest private refining-cum-petrochemical player, Mukesh Ambani’s Reliance Industries, also has ties with Saudi Aramco for oil supplies. The Kingdom is also a key supplier to public sector oil refiners such as Indian Oil Corporation.

Sri Paravaikkarasu, Director-Asia Oil, FGE Singapore, said: “A lot of news coming out now is that they (Saudi Arabia) will restart soon and the officials have said that things will be normal next week. So, all depends on how the situation pans out in the next few days.”

“If they are able to resume production as they have said, then it should not be a very big deal. We don’t expect prices to go up a lot higher, given how the market is awash with a lot of crude oil. But, if they fail to resume operations, clearly we could see an upside in prices,” she said.

But the scale of spike, if any, would depend on how much production is impacted, she pointed out, adding that any price increase will affect India.

Vandana Hari, Founder and CEO of Vanda Insights, a provider of oil markets macro-analysis, said: “Though the oil market has been focussed on weaker global oil demand growth and potential oversupply in recent months, the Saudi outage swings the pendulum to a significant shortage — at least until it can be compensated by the release of barrels from strategic inventories.”

“Given the magnitude of the production outage and uncertainty over its duration, we expect a major spike in crude prices when markets open on Monday. Brent and WTI futures, which settled close to three-week lows on Friday, could rocket by up to $10/barrel in a knee-jerk reaction.”

Besides, sustainability of the rally will hinge on an assessment of the magnitude and duration of the supply shortfall, taking into account the mitigating measures, she said points out.
Published on September 15, 2019
Saudi Arabia
energy and resource


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