Saturday’s drone attack on oil fields and a key production facility in Saudi Arabia could mean drivers will be paying as much as 25 cents more per gallon in the short term, and economists predict that further tensions in the Middle East could lead to a more sustained elevation in oil prices.
“I think oil prices will be elevated for weeks, if not months. A risk premium will likely stick around for quite some time,” said Patrick DeHaan, head of petroleum analysis at GasBuddy.com.
The attacks by Iran-backed Yemeni Houthi rebels cut the kingdom’s exports in half, an amount that comprises more than 5 percent of the world’s oil supply. International benchmark Brent crude jumped by nearly 20 percent and West Texas Intermediate spiked by more than 15 percent, with both metrics lowering slightly to a roughly 10 percent increase each by Monday.
“This is incredibly serious,” said Tom Kloza, global head of energy analysis at Oil Price Information Service. “Before Saturday, the geopolitical risk premium was measured in a few dollars per barrel and one could even argue that there was a geopolitical risk discount tied to the trade war. Now, we are likely to see a risk premium of $10 to $20 per barrel,” he said.
American drivers can expect to pay between 10 cents and 25 cents more per gallon in the near term, analysts estimated. The biggest X factor is how long it takes Saudi Arabia’s state-owned Saudi Aramco to repair and bring its facilities back online. CNBC reported that the goal was to have about one-third of the production restored Monday.
Kloza suggested the remaining damage, and necessary repair work, could be more extensive than initially believed. “I think one should expect that Saudi production and exports will be crimped well into autumn. Damage assessments take time and it looks as though damage was very severe,” he said.
Analysts’ concern has not, thus far, been shared by the White House. On Saturday, President Donald Trump tweeted that he had authorized a release from the nation’s Strategic Petroleum Reserve, if necessary.
“Because we have done so well with Energy over the last few years (thank you, Mr. President!), we are a net Energy Exporter, & now the Number One Energy Producer in the World. We don’t need Middle Eastern Oil & Gas, & in fact have very few tankers there,” Trump tweeted on Monday morning.
This increase won’t insulate drivers from higher prices, though. The growth in American oil production is largely due to a boom in shale oil extraction, which U.S. refineries generally aren’t equipped to process.
A bigger problem, according to analysts, is that the attacks underscored the vulnerabilities faced by one of the world’s biggest oil producers — injecting a fear factor into the market that could hang over prices even after production is completely resumed. “The shock that such an event happened in Saudi Arabia, a stable and reliable oil producer, will likely continue to haunt the market,” DeHaan said.
Caroline Bain, chief commodities economist at Capital Economics, said in a research note that a quick restoration of Saudi Arabia’s capacity is critical both in terms of maintaining supply as well as assuaging investors’ worry. “The rapid resumption of ‘business as usual’ will reassure the oil market that Aramco is able to cope with militant attacks,” she said.
While oil market observers said the attacks are unlikely to be the catalyst for recession, they characterized them as a potentially daunting headwind. And this assumes that the geopolitical tensions between Saudi Arabia and Iran don’t spill over into open conflict, which would likely have a sharper — and less predictable — impact on prices.
“The most pivotal item will be, if Iran is proved to be behind the attacks, what kind of reprisals might be forthcoming?,” Kloza said. “If the Saudis or U.S. respond militarily to Iran, the calculus can be much more substantial.”