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$ 300 Oil: What if the attacks in Saudi Arabia had ruined production?



Saudi Arabia's Crown Prince Mohammed bin Salman (MBC) has told CBS that oil could reach "unimaginably high numbers" if a war with Iran were to erupt, which he suggested could happen if "the world does not take a strong and firm action to and deterring Iran. "

And while MBS is known for engaging in hyperbole when it comes to the threat Iran poses, recent events suggest he may have a point here. But what are these unimaginably high numbers he suggests? $ 100 a barrel ? $ 300 a barrel? And what would the world look like if prices really went so high?

The recent drone strikes on Saudi Aramco's oil plant, which took 5.7 million bpd offline, have been largely attributed to Iran ̵

1; even if the Houthis This attack was proof that Iran has the means to strike at the heart of the Saudi oil structure, and in an entire war it is reasonable to suggest that a strike at these facilities could be far more devastating. they can 5.7 mi llions bd per day are taken offline offline – leaving the global oil industry in a very precarious position.

While this may be a hypothetical scenario, it is one that the attacks of September 14 proved to be possible, and it is in the light of these attacks that MBS & # 39; s words can be fully understood. A destructive attack that takes almost 6 million bpd of oil production offline – permanently – will surely have a much deeper impact on oil prices than the actual attack on Saudi facilities did. Following this attack, Brent briefly topped $ 70 a barrel and then quickly withdrew after assurances from Riyadh. Then the international benchmark portfolio rose sharply once again – albeit not so high – when reports emerged that repairs could actually take months rather than weeks. But in the end, the panic was short-lived, and as new information about Saudi Arabia's ability to quickly bring production back on line came in, oil prices eased again, almost as if it didn't happen at all.

Days after the attacks, some analysts predicted $ 100 Brent prices, but there were also more sober minds that said there was no reason why oil would rise so high that some OPEC + members could increase production and that American slate would do the rest. But this reliance on U.S. slate and other OPEC members is perhaps a bit optimistic in such a scenario. Related: Don't expect oil prices to go much higher this year

Iran and the UAE are the two OPEC members with the highest potential available capacity, but if Iran and the UAE were at war they probably would watch production sink even further. That means almost all of the 5.7 million bpd had to be replaced by the United States, something even the avid slate supporter would struggle to believe.

The United States has significantly increased production over the past year, but the upward momentum may not be sustainable. In its latest short-term energy savings, EIA has estimated production to have increased by 1.2 million bpd from 2018. But that growth has been dampened by recent poor results from some of the most promising shale pools in the United States.

The reality is, no single oil producer can increase production by 6 million barrels per day, and that 6 million bpd is realistically a conservative estimate if a full-blown war were to occur.

If 6 million bpd or more were taken offline for any significant timeframe, which could be caused by anything from the real possibility of closing the Hormuz Strait to a new attack on Saudi Aramco oil infrastructure, oil prices would actually peak at # 39; incredible levels & # 39 ;.

If it was unclear when production could resume, it would be a crazy scratch to see who could pick up the slack – not to keep prices down, but to see who could steal the market share. Countries will undoubtedly do their best to increase production, but that will be insufficient. The global strategic petroleum reserves will all be used to keep the market supplied, but this is a very short-term solution.

Large oil consumers such as China and India are desperately looking for alternative suppliers. But even more important is that these major consumer countries will be crushed if oil prices rise above $ 100. It's hard to tell how much oil China has in storage and whether they could cushion the blow, but they would use up what they've had pretty quickly.

India is already trying to beef up its oil in storage to support problems in the Middle East, and work is underway to build more storage locations that will be ready by next year. India's goal is to eventually have 90-100 days of oil in storage, to maintain the import price of 80%.

Chinese data is more turbid, but it is widely accepted that China has prepared its oil for storage and exploited by moderate oil prices. Related: Big Oil Fights For Its Life

Japan and South Korea are also major importers, with Japan having significant reserves somewhere near 300 million barrels.

Despite the release of various SPRs, the long-term reality of oil markets would keep prices extremely high until new production came online, or to demand destruction occurred.

But how high could oil prices really go? In the event of a 6 month long disturbance of 6 million bpd, $ 100 oil certainly seems possible, but what if the 20 million bpd Hormuz Strait is cut off for a number of days or even weeks? Or what if the production capacity of several other Gulf nations is disrupted? A 20 million bd supply crusher could potentially send oil for $ 300. But oil prices do not have to go so high to seriously boost high consumer economies.

India has been quick to sound an alarm every time Brent has climbed higher than their pain threshold, which is lower than $ 80. This will inevitably lead to demand problems. We have seen this several times already: oil prices are jumping, demand is falling, oil prices are falling, demand is improving, and then the global economy is continuing to grow.

The largest buyers of crude oil in the world would have difficulty sustaining growth if oil trades near $ 100, let alone if oil trades at $ 200 or even $ 300 a barrel. And the time it will take for oil prices to come back would be painful.

In light of this historical evidence, MBS's thinly veiled oil price warning may be largely seen as sabotaging, but the outlook for "unimaginably" high prices may not be as far fetched as some analysts would think.

By Irina Slav for Oilprice.com

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