This oil shock may be different

  • Nation
  • Monday, 16 Sep 2019

An Aramco oil tank is seen at the Production facility at Saudi Aramco's Shaybah oilfield in the Empty Quarter, Saudi Arabia.

The disruption of Saudi Arabia’s production facilities comes at a time when the world is experiencing an excess supply of crude oil and slowing economy.

THE world has witnessed several oil shocks that cause prices to double or triple due to supply disruptions.

The attack on Saudi Arabia’s oil-producing facilities that would cut down on almost 50% of its production (which is 5% of the daily global oil supply) will spark another oil shock.

However, this oil shock could be different.

This is because the disruption comes at a time when the world is experiencing an excess supply of crude oil and a slowing economy.

According to the Organisation of the Petroleum Exporting Countries’ (Opec) oil report, global consumption is expected to be 99.84 million barrels per day (mb/d) this year and 100.92 mb/d next year.

Global supply of crude oil in August was 99.24 mb/d, which was marginally below demand.

However, global supply is down only because major oil producers, especially members of the Organization of the Petroleum Exporting Countries (Opec), have cut back on production to ensure that the price of the commodity is stable at about US$60 (RM250) per barrel.

For instance, Saudi Arabia had been cutting down on production since 2017 to help push up prices.

The International Energy Agency (IEA) said in a report that it had expected some 1.4 million barrels of oil to be produced daily which was more than what the markets needed.

On top of major producers reducing production, all developed countries are sitting on record stockpiles of crude oil due to high production and reduced demand.

The United States, for instance, is sitting on a 22-month high stockpile of crude oil while China, which is a big consumer of crude oil, is not fuelling demand due to its slowest economic growth in its history.

Saudi Arabia, which is holding the world’s largest oil reserves, said its production is expected to drop to about 5.7 mb/d following the drone attacks.

Last month, Saudi Arabia produced 10.3 mb/d and it was almost 30% of Opec’s total supply.

Hence, Saudi Arabia’s 50% supply disruption will certainly have an impact on crude oil prices.

But how big an impact would it be?

Previous oil shocks caused by supply disruptions generally see oil prices double.

In the 1973 oil price shock, the price of brent crude doubled while in 1979/80, it peaked at US$103.

This time around, the impact on oil price is expected to be slightly muted.

Analysts are expecting oil price to increase by between US$5 and US$10 (RM21 and RM42) per barrel from its current price of US$60.22 (RM251) per barrel.

It is not expected to cause major increases in oil prices compared to previous oil supply disruptions.

The sustainability of crude oil at higher prices would also depend on whether other producers step up to increase their production.

For instance, Russia can quickly cover the shortfall of Saudi Arabia’s production.

The damage caused in Saudi Arabia’s processing facility is something that cannot be rectified overnight.

It probably will take Saudi Arabia a few months or at least a year before it can get back to what it produced previously.

Hence, the latest incident has certainly put a major dent on the listing of Saudi Aramco, which was slated to be the world’s most valuable company with a value of US$2 trillion (RM8.3 trillion).

It has also increased the level of political volatility in the Middle East.

If Saudi Arabia retaliates, it could point to a sustained hike in oil prices.

For now, what appears certain is that the price of oil should see some stabilisation at a higher level from the current US$60 (RM250).

Whether it is US$65 (RM271) per barrel or US$70 (RM292) per barrel, it would be good for oil-producing countries such as Malaysia.

The Budget 2019 was based on oil at US$70 per barrel.

However, so far this year, it has averaged US$65 per barrel.

In Brent crude averages US$75 (RM312) per barrel in the last four months of the year, it would augur well for the Malaysian economy. The Budget 2019 targets should be met.

Couple the rise in oil price with the weakening of the US dollar due to a drop in interest rates there, the ringgit should improve.

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