The drone attacks on the world's largest oil processing facility in Saudi Arabia and a major oil field on Saturday have disrupted global oil supply and sent prices soaring. In the initial reaction to the news, ICE front-month Brent rallied nearly 20 per cent to $71.95 a barrel on Monday, S&P Global Platts reported. That's the biggest single day gain in percentage terms in 28 years. Although prices retreated somewhat to a little over the $66 level, it's still way above Friday's close, when benchmark Brent Crude traded at $60.52 a barrel.
Given that India is the world's third largest oil importer - we import over 80 per cent of our oil requirements - such a hike will inflate the import bill and disrupt the country's fiscal position. Here's a detailed look at the attack on Saudi Aramco's facility and the repercussions for India:
The drone strike
Ten unmanned aerial vehicles attacked Saudi state-owned oil giant Aramco's crude-processing facility in Abqaiq as well as the kingdom's second-biggest oil field in Khurais, sparking huge fires and disrupting more than half of Saudi Arabia's oil capacity, or an estimated 5.7 million barrels. With the world's largest exporter of oil taking such a massive hit, experts predict that around 5 per cent of global oil supplies will be impacted, while tensions across the Persian Gulf - already fanned over the US-Iran nuclear standoff - are likely to escalate.
The attacks resulted in "the temporary suspension of production operations" at the Abqaiq oil processing facility and the Khurais oil field, Energy Minister Prince Abdulaziz bin Salman said in a statement. He added that Aramco would have more information within 48 hours, and it will draw down oil in storage to compensate for the loss.
For oil markets, this is the single worst sudden disruption ever, surpassing the loss of Kuwaiti and Iraqi petroleum supply in August 1990, when Saddam Hussein invaded his neighbor. It also exceeds the loss of Iranian oil output in 1979 during the Islamic Revolution, Bloomberg reported citing from the U.S. Department of Energy.
While Yemen's Iran-aligned Houthi group claimed responsibility for the attacks - a part of the ongoing four year old war against a Saudi-led coalition to reinstate the internationally recognised Yemeni government - US Secretary of State Mike Pompeo put the blame squarely on Iran, tweeting that the country "launched an unprecedented attack on the world's energy supply" and that there was "no evidence the attacks came from Yemen". Iran has rejected such allegations.
Impact on India
Petrol and diesel prices are likely to increase in India in the next few days, in line with the current uptick in global prices. Currently, a litre of petrol is selling at Rs 71.89 in Delhi, Rs 77.57 in Mumbai, Rs 74.70 in Chennai, Rs 74.62 in Kolkata.
But experts say any price hike in the offing will be short-lived - again due to the diversified crude procurement strategy that Indian oil companies have in place. Executives working for oil marketing companies told Mint that the oil PSUs - Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd - should see limited impact on crude supplies following the drone strikes. Saudi Aramco, in fact, reportedly told one Indian refinery there will be no immediate impact on oil supplies as it will deliver crude from other sources and has adequate inventory.
Nonetheless, the sudden increase in Brent prices will affect India's oil import bill and its trade deficit since the country imports over 80 per cent of its oil requirements. India's trade deficit stood at $13.45 billion in August, as per government data released on Friday. The depreciating rupee only makes matters worse since Indian refiners pay for their crude in dollars. The domestic currency slipped 70 paise to 71.62 per dollar compared to Friday's close of 70.92.
The Brent rally may also have an impact on India's fiscal deficit, which widened to 77.8 per cent of the budgetary estimates in the first four months of financial year 2019-20 to reach Rs 5.47 lakh crore.
What happens next?
Saudi Arabia can restart a significant volume of the halted oil production within days, but needs weeks to restore full output capacity.
Meanwhile, US President Donald Trump's recent tweet saying that he had authorised "the release of oil from the Strategic Petroleum Reserve, if needed" to keep the markets "well supplied" also helped stabilise oil prices after its initial uptick earlier on Monday.
However, Saudi Aramco could consider declaring itself unable to fulfill contracts on some international shipments, known as force majeure, if the resumption of full capacity at Abqaiq takes weeks. That would be terrible news for oil markets, coming on the heels of already curtailed global oil supply. In July, the Organisation of Petroleum Exporting Countries (OPEC) agreed to extend oil supply cuts until March 2020 as the group's members overcame their differences in order to prop up the price of crude amid a weakening global economy and soaring US production.
"No matter whether it takes Saudi Arabia five days or a lot longer to get oil back into production, there is but one rational takeaway from this weekend's drone attacks on the Kingdom's infrastructure - that infrastructure is highly vulnerable to attack, and the market has been persistently mispricing oil," Citigroup Inc's Ed Morse wrote in a research note.
With geopolitical risk back in focus, S&P Global Platts Analytics estimates oil prices could test $80 per barrel in the coming days and add to the headwinds faced by the global economy.
With Reuters inputs