Oil Prices Surge After Saudi Attack But Capped by Ample Supply

The world is flush with excess oil, a factor that put a cap on the increase in crude prices following the attacks on the heart of Saudi Arabia’s oil industry.

The price of Brent crude spiked 20% to a high of $71.95 a barrel when Asian trading opened on Monday, which would have been the global benchmark’s biggest one day rise in more than 30 years. But by the U.S. morning, Brent had retreated to $65.75, a gain of 9.2%, as traders gauged how much extra inventory is available to meet the demands of the global economy.

Stockpiles of oil world-wide could be released to curtail another threat to the weakening world economy if the disruption in Saudi Arabia is prolonged. The weekend attacks knocked 5.7 million barrels a day off the kingdom’s oil production. That is equivalent to almost 6% of world-wide consumption each day, according to the International Energy Agency. On Sunday, President

Trump

said he authorized the release of oil, if needed, from the Strategic Petroleum Reserve to help offset cost increases. “If [the disruption] is measured in weeks, it sounds like there’s enough in storage in various locations” in Saudi Arabia for the kingdom to meet its obligations to customers, said Saad Rahim, chief economist at commodity trading house Trafigura. But if the outage lasts more than around four weeks, then Saudi could start to have difficulties and prices are likely to rise further, he added.

Saudi Arabia’s own stockpiles of oil have fallen in recent years, but remain sufficient to ensure the kingdom’s customers don’t experience shortages provided the disruption is relatively short-lived. The nation holds around 188 million barrels of crude and 97 million barrels of refined-oil products in storage, according to

Amarpeet Singh,

an analyst at Barclays, enough to cover the country’s exports for around 35 days. On top of domestic stockpiles, Saudi Arabia also stores oil close to key consumers in the Americas, Europe and Japan. “A lot of oil is pre-positioned close to the markets where their consumers are based,” said

Harry Tchilinguirian,

head of commodity strategy at

BNP Paribas
.

A key question for energy traders is how much damage has been done to Abqaiq, a massive processing plant at the heart of Saudi Arabia’s energy system that was targeted in Saturday’s attack. The kingdom is racing to restore around one-third of capacity knocked out by the attacks on Abqaiq and on the Khurais oil field by the end of Monday, The Wall Street Journal reported. “The longer Abqaiq is down, the higher the risk to exports,” Mr. Tchilinguirian said. Members of the IEA, including the U.S., are required to hold emergency stocks of oil that could cover 90 days’ worth of lost imports. They can deploy these reserves in unison to avoid an oil shock, as in June 2011, when the U.S. and 27 other countries acted to release 60 million barrels of oil from strategic reserves to drive down prices during disruption caused by the civil war in Libya. The U.S. holds around 600 million barrels of oil in reserve and other governments have a further 1.2 billion, said

Oswald Clint,

a senior analyst for Sanford C. Bernstein & Co.

Although a major oil shortage isn’t imminent, a long outage in Saudi Arabia is likely to keep oil prices elevated. The Daqing oil field in China.

Photo:

china stringer network/Reuters

Even more oil is held commercially, though this cannot be released deliberately by officials to avoid an oil shock. Commercial inventories stand at about 2.9 billion barrels, down from 3.3 billion in 2015 and 2016, Mr. Clint said. This figure used to be higher because of falling demand, he added. Although a major oil shortage isn’t imminent, a long outage in Saudi Arabia is likely to keep oil prices elevated because the market depends on the kingdom to ramp up output in times of crisis. The ability of other members of the Organization of the Petroleum Exporting Countries to boost output at short notice has diminished, while shale producers in the U.S. are under pressure from shareholders to show discipline and not over-invest in new production capacity. Heightened tensions in the Middle East, the falling chances of a rapprochement between the U.S. and Iran, and the vulnerability of Saudi energy infrastructure are also likely to push oil prices higher even if there is enough oil for energy consumers to tap. “This is a significant escalation in the region,” said

Chris Midgley,

director of analytics at S&P Global Platts. “If you start taking supply out of the biggest producer in the world, that is crucial.” —Pat Minczseski contributed to this article. Write to Joe Wallace at Joe.Wallace@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com

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