After the huge attack of Saudi at Abqaiq refinery the output decreased 5.7M barrel /day which is nearly 5.7% of the total oil supply.You can ask your self,is it significant amount or just „leave it”.Let us have a quick calculation. In case if the supply outage remain the same for 3 months it would be equal more than the whole US inventory (401M barrel) excluding emergency oil inventory which means it is amount should consider a significant supply outage.
The real question right now is not really when will return the production to the same level as was before the attack. What is more important is that how the global supply can respond for this shock.I mean how quick can other country fill up outstanding supply if they can or if they want.How much flexibility has the global oil supply and how vulnerable it. We will see now who is bluffing and just suffer increase the supply and who can respond quickly.
Other big concern is the critical infrastructure security because if this attach could occur with the one of the biggest oil production even after unsuccessful attack in 2006 it could happened anytime anywhere (Big brother never sleep) in the world. Shale production which have spare capacity to increase the supply quite quickly is happening in very limited geographic area main in US where the supply increment can be highly limited within short term due to limited human and machinery assets as well as limited space.
In my opinion oil supply respond will not be happened so easily as we think, specially if the oil price will spike only for a short term and than back to original level.Therefore Oil price (West Texas – WTI) will increase over 25% by end of 2019 and the target price is 80USD/barrel. Thereafter, would be the key question if Saudi back to normal supply level after sometimes it will be something extra supply (other nation increased the supply than decrease the supply again) or everybody back to normal supply level as was the case before the attack.
After this attack other successful attach can hurt any plant which increase significantly the risk of investment in the very low yield environment where risk free return is declining and expected return is shrinking.Two critical event can happen in relation to declining yield environment in the future in the oil market. One is that risk premium will increase on oil business investment which will increase the expected return of investment which maybe decrease amount of investment amount if oil price would remain low (40-60USD) level in long run. Other critical point is that if the risk free return remain low, to be able to meet investor return expectation, would require an higher level of oil price to reach require investment return.
Recap, would be the key point of current oil supply respond for significant outage and the top of it how the global supply will change if Saudi refinery back to online with 100% capacity.Also the key point if this successful attach (The Persian Gulf War Oil Spill (1991) where supply outage nearly 400M barrel, 2006 attack try, 2010 BP oil spill where nearly 200M gallon went into the water,2019 Saudi refinery attach which total supply outage undeterminable at this stage) could be a real treat to anybody else how increase the cost of project on execution side as well as project finance side.
Gergely Tóvári 