Saudi seeks to reassure on oil supplies after attack

Saudi Arabia sought to reassure the oil market on Tuesday that it can keep customers well-supplied despite attacks on its key facilities, sending crude prices sharply lower after they had spiked the previous day.

The kingdom’s crude oil production was cut by more than half at the weekend by strikes on its critical Abqaiq oil processing facility and a big oilfield, pushing prices up by as much as 20 per cent on Monday.

People briefed on the extent of the damage at Abqaiq, which processes more than 70 per cent of the kingdom’s normal output, have warned it could take months before full production is restored.

But oil prices fell sharply on Tuesday — dropping more than 7 per cent — after Prince Abdulaziz bin Salman, Saudi Arabia’s energy minister, said the kingdom had restored half of the lost production and would fully restore output by the end of September. He added that full production capacity of 12m b/d would not be available until the end of November.

Brent crude, the international benchmark, fell as much as $6.23 to $63.79 a barrel immediately after his comments, before recovering to near $65 a barrel. US benchmark West Texas Intermediate lost $3.40 to $59.50 a barrel.

Four people close to the Saudi Arabian energy ministry cautioned, however, that the energy minister’s statement was optimistic and did not fully account for the severity of the damage at the facility, and appeared to contradict earlier guidance.

One of the people said full repairs were still expected to last until at least the end of October and that the assessment included utilising oil held in storage by the kingdom, rather than a swift resumption of such a high percentage of the lost output.

Another person said the report was an attempt by Saudi Arabia officials to calm the market by presenting a rosier outlook, fearing the US and its allies could flood the market with their emergency oil reserves.

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Part of the new more positive messaging may be linked to the desire of Crown Prince Mohammed bin Salman, the country’s de facto ruler, to push ahead with the planned stock market listing of state oil company Saudi Aramco, they said.

Analysts have said the attacks exposed the Abqaiq facility as a weak link in the world’s largest oil exporter. They are also concerned about the possibility of further attacks and escalation into a wider conflict.

Houthi rebels in Yemen, who are supported by Iran, took credit for what they claimed was a drone attack. But the US has blamed Iran, which has denied involvement.

A senior US official told the FT on Tuesday that the Trump administration concluded that the assaults included long-range precision-guided systems that hit the targets from the north-west — a finding that the Saudi intelligence have not yet backed up but could pave the way for retaliatory measures from the US.

Mike Pompeo, the US secretary of state, was due to arrive in Saudi Arabia on Wednesday to discuss the weekend attacks with Crown Prince Mohammed. The state department said he would also talk about efforts “to counter Iranian aggression in the region”. He will then travel to Abu Dhabi to meet Crown Prince Mohammed bin Zayed, de facto leader of the United Arab Emirates, a key US ally in the Middle East.

Donald Trump, US president, said on Monday that while he did not want war with Iran, America was “more prepared” for a military conflict than at any point in its history. “With all that being said, we’d certainly like to avoid it,” Mr Trump said.

King Salman, Saudi Arabia’s monarch, on Tuesday urged the international community “to shoulder its responsibility in condemning the perpetrators” and confront the “barbaric acts”. While the world’s top oil exporter and key US ally has not directly blamed Iran, the Saudi-led coalition fighting the Houthis in Yemen said the initial investigations indicated that Iranian weapons were used in the attack.

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“This attack is an extension of previous acts of aggression on Saudi Aramco’s pumping, using Iranian weapons”, the Saudi cabinet said in a statement, referring to an earlier assault in May.

Washington and Riyadh have long accused Iran of supplying regional militant groups, such as the Houthis, with training and arms, including missiles and drones. The Houthis have increased their drone and missile attacks into Saudi Arabia in recent months, but mostly in the kingdom’s south, which borders Yemen.

The weekend strikes on the oil facilities were far more sophisticated and damaging than previous attacks, and hundreds of miles from the Yemeni border, raising questions about whether the Houthis had the capability to carry them out. The US official would not discuss the Iranian role, but said the fact that the attacks came from the north-west was significant.

The production disruption and prospect of military escalation have prompted questions over the prospect of a Saudi Aramco listing, which is key to the crown prince’s plans to transform the kingdom’s economy. Two people close to the oil company emphasised the ability of Saudi Aramco and its contractors to bring production back quickly within weeks, saying they had become more optimistic in the last 24 hours, and that restoring more than 70 per cent of output was realistic.

But scepticism is likely to persist. Saudi Arabia’s state-owned Al Arabiya media outlet reported that employees at Abqaiq were only allowed back on to the compound for the first time on Tuesday.

Yasir Rumayyan, Aramco’s chairman, said at Tuesday’s press conference that the kingdom remained committed to the initial public offering within the next 12 months. Before the attacks, Saudi officials privately said the kingdom was targeting an IPO before the end of this year.

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Saudi Arabia has been drawing down its own oil stockpiles to try to keep international customers fully supplied since the outage, and has also diverted its remaining output of around 4m barrels a day from its own domestic refineries and power plants to help maintain exports.

The kingdom said the total loss from Saturday’s attack was 5.7m barrels of crude a day, or the equivalent of more than 6 per cent of global supplies. Natural gas production was also affected.

Russell Hardy, chief executive of Vitol, the world’s largest independent oil trader, told the FT it was unlikely the kingdom could return to full capacity so quickly. “They won’t get back to normal, but get back to near-normal. What does near-normal mean? Does that mean they are a million barrels a day short, or 2m b/d short?” he said.

The kingdom also has spare production capacity it may be able to bring on stream, but much will depend on restoring Abqaiq, which prepares so much of the kingdom’s crude for export by removing sulphur and other impurities, and separating it from natural gas.

People briefed by the energy ministry on Monday, after a technical meeting of engineers and the ministry on restoring Abqaiq, said the facility has some limited redundancy built in that may help it start processing more crude. Some output could still return quickly as it was shut in largely as a precaution, they also said.

But the technical assessment suggested Saudi Arabia’s total output could be still around 2m barrels a day below its pre-attack level of 9.8m b/d in October.

Additional reporting by Gregory Meyer in Houston

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