The oil price spike caused by a drone attack on a major Saudi processing facility will provide a welcome − but short-lived − boost to North Sea revenues, a prominent petroleum economist said today.
UK operators take a “long-term view” and won’t make investment decisions on new projects based on a price increase of a few dollars, said Aberdeen University professor Alex Kemp.
But Prof Kemp did say the markets could become “inflamed” for longer if the US decided to retaliate against Iran, which Washington holds responsible for the assault.
Iran-backed Houthi rebels in Yemen claimed credit for the air strike.
Prof Kemp added that events in Saudi Arabia showed how vulnerable oil installations were to drones, and warned that other militants could get “ideas”.
The attack stripped the market of 5.7 million barrels of oil per day, which equates to about 5% of global demand.
Brent crude, the global benchmark, skyrocketed by about 20% to $71.95 per barrel this morning − the biggest gain in percentage terms since 1991.
Prices cooled off as the day wore on, with the global benchmark trading 8.6% higher at $65.40 per barrel in the afternoon.
Prof Kemp said the loss of such large volumes was always likely to “shock” the market.
But he wasn’t surprised some of the early price gains had been handed back.
The market is “well supplied”, with vast Saudi oil reserves held in storage at various global centres.
And while no one can cover a 5.7m barrel shortfall alone, other countries such as Russia, the UAE and Kuwait do have spare capacity which could offset some of the impact.
Opec and its allies reduced production by 1.2m barrels from the start of this year in a bid to support prices, but those cuts cannot be fully reversed, as Saudi Arabia was fulfilling a large chunk of that quota.
The US also has significant reserves at its disposal, which could be released.
Prof Kemp said the longevity of any effects on the market depended partly on how long it takes to fix the Abqaiq facility.
“The longer it takes to repair, the longer the price will stay up,” he said, adding: “The impact on oil prices is not going to be dramatic. We’re not going to get $100 per barrel or anything like that.”
Prof Kemp compared the supply disruption in Saudi Arabia to the loss of oil when Iraq, led by Saddam Hussein, invaded Kuwait in August 1990.
He recalled that the oil price rose sharply, but had dropped all the way back down within six months.
Prof Kemp believes the crude price spike in the aftermath of the drone attack could be completely eroded in the coming weeks.
“If nothing else happens, this will be a blip lasting weeks rather than months or years,” he said. “The increase will be there because of the shock effect, but when you look at fundamentals, the supply and demand balance is such that the market is well supplied.”
Prof Kemp’s colleague, Marc Gronwald, senior lecturer in energy economics at Aberdeen University, agreed that an escalation of the situation or military action would certainly drive oil prices further up.