Following the drone attack against Saudi Arabia’s crucial oil facilities, Wood Mackenzie discusses with Ann-Louise Hittle, Head of Macro Oils how the attach affected Saudi Arabia’s production.
Namely, the Middle East is responsible for one-third of the global capacity. That’s why, the concentration risk is high. Middle East’s weakness has been the open waters of the Strait of Hormuz, where the tensions have been increased in the last months.
As Simon Flowers, Chairman and Chief Analyst stated
The attack shows that other critical elements of the supply chain are more easily disrupted than we imagined.
Also, the development of tight oil has played a role in decreasing the US import dependence; The outcome is a ramping up of the risks to global oil supply. Before the attack at Abqaiq, outages surpassed 5 million b/d, or 5%, of global demand. Half of that was because of US sanctions on exports from Iran and Venezuela, that were imposed in the last three years.
In the meantime, WoodMac forecasts that the US volumes will surpass the 20 million b/d in the early 2020s, almost double that of Russia or Saudi Arabia. The US’s increased production by 7 million b/d in the early years of this century to 17 million b/d in 2019, was due to the ‘short cycle’ tight oil. Yet, short-cycle doesn’t mean instant response, as Ann-Louise highlights. Tight oil may take 9 to 12 months for new wells to be drilled, completed and brought to market.
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The independent E&Ps (Exploration and Production companies), accounting for the 80%of Permian production, have been used by shareholders to focus on generating cash flow and dividends rather than spending for growth.
Next year, the oversupply could worsen, assuming Saudi capacity returns to normal. More production is due on stream from the US, Canada, Brazil, Norway and Canada, among others. WoodMack expects OPEC+ will need to cut supply further in 2020.
Concluding, WoodMack comments on the future
It’s far from clear. The US doesn’t want conflict to erupt with an election only a year away; Iran still less. With this attack on crucial oil infrastructure, we’ve taken a few steps further down a very dark corridor. We can’t see what’s at the end. But there’s a sense of foreboding that what lurks there might be pretty scary.