(Reuters) – Attacks on Saudi oil plants have boosted concerns about supply security in the Middle East and should raise the risk premium in the global crude market, shifting focus from a gloomy economic backdrop, S&P Global Platts said on Sunday.
FILE PHOTO: An employee shows a sample of crude oil in the Yarakta oilfield, owned by Irkutsk Oil Company (INK), in Irkutsk Region, Russia, in this picture illustration taken March 11, 2019. REUTERS/Vasily Fedosenko/Illustration/File Photo
“The sudden change in geopolitical risk warrants not only an elimination of the $5-10 a barrel discount on bearish sentiment, but adds a potential $5-10 a barrel premium to account for now-undeniably high Middle Eastern dangers to supply and the sudden elimination of spare capacity,” it said in a note.
“As such prices are likely to break out of the current $55-65 a barrel options range, to test the high $70s as currently supported by fundamentals.”
Prices could move higher still if Saudi output is curtailed for a more substantial period, the note’s author Chris Midgley, global head of analytics at S&P Global Platts, wrote. However, that is not its current assumption.
An industry source briefed on the developments told Reuters on Sunday that Saudi Arabia’s oil exports will continue as normal this week as the kingdom taps into stocks from its large storage facilities.
Platts said, however, that “any evidence of prolonged disruption of production would heavily impact OPEC spare capacity and the ability of the IEA to use Strategic Petroleum Reserves to shore up the market”.
Yemen’s Houthi group claimed responsibility for Saturday’s attacks that knocked out more than half of Saudi oil output, or more than 5% of global supply. U.S. Secretary of State Mike Pompeo said the assault was the work of Iran, a Houthi ally. Iran rejected the accusations.
State oil giant Saudi Aramco said the attack cut output by 5.7 million barrels per day. Aramco gave no timeline for output resumption. A source close to the matter told Reuters the return to full oil capacity could take “weeks, not days”.
The Wall Street Journal reported on Sunday that Saudi Arabia is aiming to restore a third of lost oil output by Monday.
Platts said that higher oil prices will add to the headwinds faced by the global economy.
Reporting by Kanishka Singh in Bengaluru; Editing by Jan Harvey