The world's oil producers keep a massive amount of capacity in reserve. But it's almost all in Saudi Arabia and the drone attack messed with that too.

Sinéad Baker
Saudi Arabia oil attack aramco

VIDEOS OBTAINED BY REUTERS/via REUTERS


  • The drone attacks on Saudi Arabia's oil plants didn't just halve the country's production and send the price of oil rocketing.
  • They also harmed the country's spare production capacity, which can produce some 2 million barrels a day and used during emergencies.
  • Drones hit two refineries owned by state-owned giant Saudi Aramco on Saturday, shutting down production on around 5% of the world's daily crude oil production and causing oil prices to surge up to 20%.
  • The world's oil market is well supplied for now, but other oil producing countries are unstable, don't have these facilities, or are under sanctions.
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The attacks on Saudi Arabia's oil plants not only wiped out half of the country's production, but also hit the source of almost all of the world's extra oil production facilities that are used during emergencies with global supply.

Drones hit two major oil refineries owned by state-owned giant Saudi Aramco on Saturday, shutting down production on around 5% of the world's daily production of crude oil, and causing oil prices to surge as much as 20% on Monday.

The attacks not only caused immediate disruption, but also harmed the facilities that are typically used to deal with this kind of disruption to the world's oil supply, Reuters reported.

Saudi Arabia maintains oil production facilities and keep them idle, ready to be used when needed — a step that almost no other major oil producing company takes because it is too expensive, according to Reuters. 

Read more: Satellite photos show scale of destruction at Saudi oil field hit by drone attacks which put global markets in chaos

Saudi oil attack damage

U.S. government/Digital Globe via AP

Before Saudi Arabia's facilities were damaged by the attack, the backup infrastructure could have produced 2.27 million extra barrels of crude oil a day, Reuters said.

Similar backup facilities belonging to other oil-producing countries, including Kuwait and the United Arab Emirates, can only produce around 940,000 barrels a day, Reuters noted.

Those countries could now start producing with those backup plants to address the fallout of the attacks in Saudi Arabia, but that won't be enough to stem the new drop in Saudi Arabia's supply, Reuters reported.

This leaves the market newly vulnerable to any issues that could arise in any oil-producing country, many of which are currently unstable.

Smoke is seen following a fire at an Aramco factory in Abqaiq, Saudi Arabia, September 14, 2019 in this picture obtained from social media. VIDEOS OBTAINED BY REUTERS/via REUTERS

Reuters

Suhail al-Mazrouei, the UAE's energy minister, said on Monday: "We have spare capacity, there are volumes we can deal with as an instant reaction."

Iran can also produce more oil, but cannot sell it because of US sanctions on the country.

US President Donald Trump said he has ordered the use of the country's Strategic Petroleum Oil Reserves, "if needed," to "keep the markets well-supplied." It has around 630 million barrels.

Read more: The US Energy Department says it 'stands ready' to deploy resources from reserves to offset oil market disruptions after drone attack in Saudi Arabia

Many countries also have reserve oil supplies they can use, Reuters reported, but this can only supply the countries in the short term.

A satellite image shows an apparent drone strike on an Aramco oil facility in Abqaiq, Saudi Arabia September 14, 2019. Planet Labs Inc/Handout via REUTERS

Reuters

The long-term effect on oil prices and supply remains unknown, and analysts say that new information about the extent of the damage and the likelihood of further attacks or any problems in oil-producing countries will determine the market.

Markets are still well supplied for now, with Christyan Malek, the head of oil and gas research for Europe, Middle East, and Africa at JPMorgan, calling it "massively oversupplied." 

Sarah Cottle, global head of market insight at S&P Global Platts, also told CNBC that the current physical supply of oil "may be quite encouraging" as reserve stocks mean countries will get the immediate supply of crude oil that they need.

She said, however, that the Saturday attack "effectively eliminates the world's spare capacity."

"The long term, or the medium term, outlook has to be bullish because ultimately without the spare capacity with the draw down on stocks it can only last so long if this outage continues," she added.

Tom Kloza, chief oil analyst for the Oil Price Information Service, said the new oil prices "will likely haunt us for months, at least weeks."

It is not known how long it will take Aramco to return to full production — two sources close to the issue told Reuters that it could take months. Earlier estimates said it could take weeks.

This image provided on Sunday, Sept. 15, 2019, by the U.S. government and DigitalGlobe and annotated by the source, shows damage to the infrastructure at at Saudi Aramco's Kuirais oil field in Buqyaq, Saudi Arabia. The drone attack Saturday on Saudi Arabia's Abqaiq plant and its Khurais oil field led to the interruption of an estimated 5.7 million barrels of the kingdom's crude oil production per day, equivalent to more than 5% of the world's daily supply. (U.S. government/Digital Globe via AP)

Associated Press

Saturday's attacks could result in new issues in the region, where tensions have been escalating over the last few months.

Trump said on Sunday that the US is "locked and loaded" and had "reason to believe that we know the culprit" behind the attacks.

Read more: Trump says US is 'locked and loaded' in response to attacks on Saudi oil supply

Secretary of State Mike Pompeo speaks to media during a news conference with Lebanese Prime Minister Saad Hariri at the State Department in Washington, Thursday, Aug.15, 2019. (AP Photo/Carolyn Kaster)

Associated Press

Secretary of State Mike Pompeo blamed Iran for the attacks, claiming on Saturday that it had "launched an unprecedented attack on the world's energy supply."

In response, Iran foreign minister accused Pompeo of "deceit." The country's Tasnim news agency also quoted Gen. Amir Ali Hajizade, a senior Iranian Revolutionary Guard commander, as saying the country was prepared for a "full-fledged war."

"Everybody should know that all American bases and their vessels in a distance of up to 2,000 kilometers (from Iran borders) are within the range of our missiles," he said, cited by Reuters.

Yemen's Houthi rebel group claimed responsibility for the attacks, but a senior US official told media that evidence indicates the attacks were launched from Iran. Pompeo said on Saturday: "There is no evidence the attacks came from Yemen."

The United Nations and the European Union are urging restraint.

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