HOUSTON – Repairing the damage caused by the attack on the Saudi oil processing plant may be the easy part. The hard part will be calming energy markets, where oil prices have risen faster than at any time in more than a decade.
The attack on the Abqaiq factory in Saudi Arabia, which accounts for 5% of the global oil supply, and a nearby facility took 5.7 million barrels a day of offline production for at least a few days. It also highlighted the vulnerability of large Persian Gulf processing plants, pipelines and refineries.
"The psyche has changed," said Tom Kloza, head of global energy analysis at the Oil Price Information Service. "Now you have the thought: What if the other shoe falls and we have a wider conflict?"
For years, US and Saudi security analysts have been concerned about the Abqaiq processing center, which removes impurities from sulfur and makes oil less volatile so it can be safely exported on tankers. Without the plant, much of the oil that Saudi Arabia produces in its gigantic Ghawar and Shaybah oil fields would have nowhere to go.
The facility has a heavily protected perimeter, which was substantially strengthened after several Al Qaeda suicide bomber cars attacked it in 2006. Guards stopped these attackers before they reached the gates of the compound. But on-site security measures were not enough to stop the sophisticated weekend attack that damaged critical components.
While the production deficit caused by an attack on one pipeline or refinery can often be offset by others, it is not easy to compensate for the loss of processing capacity at Abqaiq, the largest facility of its kind in the world. The fires were quickly put out and repairs began. But a return to full capacity could take months, energy experts said.
"This changes the oil markets psychologically for a few years, certainly now that everything is vulnerable," said Dragan Vuckovic, president of Mediterranean International, an oil services company working in Egypt and Iraq. “A drone can hit a refinery or an oilfield facility and it causes fires, destruction and disrupts all production. It means less oil in the market and higher oil prices. "
Oil futures were up 20 percent when trading began in Asia on Monday morning, before retreating a little later. It was still the biggest one-day oil price shock since Hurricane Katrina halted production at Gulf Coast refineries and offshore oil fields in 2005, Kloza said.
The US crude contract closed at $ 8.05 a barrel, or nearly 15%, at $ 62.90 on Monday. This is still about 7% below the price a year ago. Brent oil, the world benchmark, also rose almost 15%.
Prices may have risen further if global oil supplies had not been plentiful, analysts said. It also helps to slow the global economy, oil production in the United States, and many industrialized countries have large strategic oil reserves.
The world has an estimated 90-day oil supply, and the United Arab Emirates, Kuwait and Iraq have available production capacity. New pipelines between west Texas and the Gulf Coast are nearing completion and American exports to countries such as South Korea and Japan that depend on Saudi oil will soon increase. And producers that have been knocking down platforms in recent months are likely to drill further if prices remain high.
Over the weekend, Saudi Arabia tried to accelerate the pace of tanker traffic at its ports to dampen the market shock.
Rob Thummel, managing director of energy investor Tortoise Advisors, predicted a 10-20% price increase until a full assessment of the damage to the Saudi plant was made.
"In the long run, oil prices are likely to add a geopolitical risk premium of at least $ 5 to $ 10 to the price until the chances of another strike are reduced," he said.
Thummel projected that US oil prices would be between $ 60 and $ 70 a barrel, leading to an increase of about 25 cents in the retail price of gasoline.
Americans burn about 400 million gallons of gas a day, so a 25-cent increase would cost consumers about $ 100 million a day. The national average price of regular gasoline on Monday was $ 2.56 per gallon, 29 cents lower than a year earlier. Experts say the fall in gas prices over the past year has given consumers extra disposable income – something that is now likely to disappear.
For many years, analysts believed that rising oil prices always hurt the US economy. But in recent years, that has changed. States like Texas, Louisiana, New Mexico, North Dakota and Colorado benefit when oil prices rise.
Higher prices also help smaller oil companies and oil service companies, which have laid off workers and are struggling to pay off debt in recent months. Stock prices of several shares of oil and gas companies, including Carrizo Oil & Gas, Chesapeake Energy, Apache and Hess, rose more than 10 percent on Monday.
Higher oil prices may also reduce the trade deficit now that the United States is a major exporter.
There may also be a positive side to steel companies and manufacturers that supply pipes and other equipment to the energy sector. The ethanol sector will also benefit, Kloza said, because biofuels will become more attractive to oil. This should help corn farmers in the Midwest.
That said, higher oil prices could further slow the weakened global economy, especially if the attack on Abqaiq leads to more violence in the Middle East.
"If a full-fledged war between Iran and Saudi Arabia breaks out, there will be no limit to rising prices," said Jay Hatfield, portfolio manager of InfraCap MLP, an exchange-traded pipeline fund.
Even without a war, global supplies could get tighter. US pipelines remain congested, which is likely to reduce daily releases of the Strategic Oil Reserve if the Trump government decides to use this feature. Countries like Japan and South Korea tend to be reluctant to exploit their oil reserves except during large-scale crises.
President Trump said on sunday that he had authorized the release of oil from the strategic reserve "if necessary," but his energy secretary, Rick Perry, told CNBC on Monday that the government has not made a decision about exploiting the reserve.