1) Limited (7-14 days)
2) Extended but manageable (30-120 days)
3) Structural (120+ days)
- Limited (7-14) days: This is the scenario in which Abqaiq flows proves to be entirely addressable within the next two weeks, with an initial restart early this week followed by a measured ramp-up thereafter. This would lead to a gross disruption in the 30-60 MMbbl range and should be manageable through any combination of Saudi stocks and global commercial inventories, with Saudi Arabia ostensibly surging post return to offset the net tightening caused by its temporary decline. This remains a low-likelihood scenario, with the extent of the attack suggesting at least some level of sustained damage affecting production levels.
- Extended but manageable (30-120 days): This is the scenario that is most likely. Saudi Arabia is able to manage a partial return from the peak disruption of 5.7 MMb/d but it is unable to address the full extent of the damage on key facilities for as long as four months. The gross disruption could increase into the 150-300 MMbbl range. This would exceed the ability of commercial inventories to meet the shortfall leading to higher prices. Global markets will likely look to extraordinary measures to mitigate the physical shortfall caused by the disruption, including a coordinated SPR stock release from the IEA, a potential call on China to ease market pressure through inventories, and call for increases in production from within the Vienna Alliance. On each of these fronts, the magnitude of the extended disruption becomes key given flow (for inventories) and capacity (for production) limitations.
- Structural problem (120+ days). This is the worst-case scenario, where output is out for months and the physical shortfall rises into the 350-500 MMbbl range. In this scenario, prices spike and extraordinary measures like SPR releases would be needed but would be insufficient and ultimately the market would require demand and eventually reactive supply such as the US (via higher prices) to correct for the structural imbalance in the market. Given the high priority of the facility to Aramco and the company’s prioritization of repairs regardless of cost, a stacked return means that it is unlikely that a full shutdown endures beyond 4 months unless damage is more extensive from the attacks than anticipated, or a large-scale conflict breaks out.
“What was a risk scenario has become a reality,” said Daniel Yergin, Vice-Chairman, IHS Markit. “The amount of Saudi oil offline is equivalent to one third of what passes every day through the strait of Hormuz. Two things will jangle the oil market in coming — long the recovery and what comes next.”
“Under any scenario, the heightened risk premium marks a stunning reversal for the market,” said Roger Diwan, Vice President, IHS Markit. “The combination of weak demand fed by macroeconomic fears and the potential for a U.S.-Iran détente unlocking significant volumes of oil currently under sanction had weighed on the market. Now an enduring increase in the market’s risk premium is justified.”