ICICI Securities: Enough crude inventory to supply if output is restored

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Published: September 18, 2019 2:59:54 AM

Attacks on 14-Sep’19 at Abqaiq and Khurais plants, which have capacity to process 7m b/d of crude, led to temporary suspension of 5.7m b/d (over 50%) of Aramco’s oil output.

 crude oil, inventory, output, market news,  ONGC, GAIL, Aramco, OMC, OPEC, Abqaiq plant, Khurais plantPress reports indicate 2.0-2.3m b/d of output would be restored by 16-Sep’19, while restoration of the entire output would take weeks. (REUTERS)

There were attacks at two Aramco plants on 14-Sep’19. Saudi Arabia on 15-Sep’19 said 5.7m b/d of oil output was temporarily suspended due to the attacks. Updated information would be provided within the next 48 hours and part of the fall in supply to customers would be compensated through inventory. Press reports indicate 2.0-2.3m b/d of output would be restored by 16-Sep’19 but restoring the entire output would take weeks. We believe there is enough crude inventory and spare capacity to supply markets if entire production is restored within a few weeks. Oil price movement would depend on when production is fully restored and whether there are any further attacks. If oil prices surge further it may be positive for ONGC/GAIL but may hurt the investor sentiment in OMCs.

Attacks on 14-Sep’19 at Abqaiq and Khurais plants, which have capacity to process 7m b/d of crude, led to temporary suspension of 5.7m b/d (over 50%) of Aramco’s oil output. Press reports indicate 2.0-2.3m b/d of output would be restored by 16-Sep’19, while restoration of the entire output would take weeks. WTI and Brent price initially spiked 15-19% but are now up 10%. Spike in oil price appears modest despite 5.7m b/d being the largest oil supply disruption in history; oil price surged by 118% when supply was hit by 5.1m b/d in Nov’02 due to Venezuela oil workers’ strike for two weeks. Modest oil price spike now despite a larger disruption suggests there is adequate crude inventory and spare crude production capacity to meet shortfall even if production is fully restored after a few weeks.

Assuming 2m b/d of output restarts on 16-Sep’19 and balance after 30 days, there would be a shortfall of 3.7m b/d for 30 days implying 111m bbls of shortfall. 111m bbls drawn from inventory would reduce Saudi and OECD strategic petroleum reserves (SPR) and commercial crude inventory of 2,367m bbls by just 4.7%. The US president has authorised release from SPR of 630m bbls, if needed (amount to be decided later). OPEC and its non-OPEC allies may increase output from part of their 3.7m b/d spare capacity to make up for the shortfall, if required.

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