After an attack on Sept. 14, Saudi Arabia has lost about 5.7 million barrels per day of oil production capacity. This is more than half of its capacity and about 6% of world capacity. Two major oil facilities--Abqaiq, an oil processing complex with a capacity of 7 mmb/d, and processing trains with a capacity of 1.2 mmb/d in the Khurais field--have been damaged. Houthi rebels have claimed responsibility for the drone strikes. But the United States--specifically the secretary of state, among others--has cast doubt on that and says the attacks were directly from Iran. The Saudis have been predictably optimistic about being able to partially restore production within days. However, a more realistic scenario is weeks and potentially months, given the complexity of the equipment and testing required, the release of U.S. satellite imagery showing extensive damage, and the lack of even a preliminary assessment of the damage from the Saudis. The potential impact of the attack hinges on how quickly operations can be fully restored, and on whether the kingdom or its allies--including the U.S.--choose to retaliate.
Saudi inventories are not officially reported, but the Joint Organisations Data Initiative estimates the kingdom has 188 mmb held in reserve, which means it can theoretically maintain domestic consumption and exports at the prior level for about 37 days before shortages take hold. So if capacity is restored within that time frame, the availability of supply should not be threatened and the maximum impact on annual supply would be capped at roughly 0.5 mmb/d. The implied drain on global inventories translates to roughly two days of forward supply, or 4% of the current OECD stockpile. In that scenario, we would expect prices to slightly exceed what’s in our current valuation models for one to two years, but our long-term outlook would not change as the West Texas Intermediate threshold to encourage the appropriate level of U.S. shale activity would still be $55 a barrel. As a result, our fair value estimates would not dramatically increase for most of our energy coverage. The degree of any change would depend on a company’s financial and operating leverage.
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Dave Meats does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.