Saudi attacks reveal oil supply’s fragility in asymmetric war

DUBAI (Bloomberg) - The latest and most destructive attacks on Saudi oil facilities provide stark evidence of the vulnerability of global crude supply in an age of disruptive technologies that can bring a century-old industry – temporarily at least – to its knees.

Saudi Arabia slashed crude production by half after a swarm of aerial drones bombed the Abqaiq oil-processing facility and the Khurais field early Saturday morning. State oil producer Saudi Aramco said it shut down some production as a precaution and that it would review damage to the facilities over the next 48 hours.

A protracted outage at either the processing plant, Saudi Arabia’s biggest, or the field “could be a big challenge for the oil markets,” Mele Kyari, head of state-owned Nigeria National Petroleum Corp., said Sunday in a Bloomberg Television interview.

Saudi Arabia, the biggest producer in the Organization of Petroleum Exporting Countries, is spearheading efforts by the group and its allies to cut output and drain away a surplus of crude in global oil markets. As fresh supplies have tightened, buyers are tapping oil in storage. An extended stoppage as a result of the attacks would strain the kingdom’s capacity to pump more oil and hasten withdrawals of crude from storage.

Oil markets are under pressure from concerns that the U.S.-China trade war could trigger a recession and have largely shrugged off geopolitical threats this year. Benchmark Brent crude is trading at about $60/bbl and averaging about $10 less than its high in April.

Yemen’s Houthi rebels, fighting in that country’s civil war with Iran’s support against forces backed by Saudi Arabia, claimed responsibility for Saturday’s attack. The Houthis said they launched drones, and the Saudi Press Association reported that drones were involved. Saudi Aramco said “projectiles” hit its facilities.

Although U.S. Secretary of State Mike Pompeo directly blamed Iran for the attacks, Iran’s Foreign Ministry spokesman Abbas Mousavi denied the accusation.

The use of drones show that “an air force or even particularly advanced rockets are not necessary to cause widespread economic damage to the kingdom’s center of gravity,” said Milena Rodban, an independent risk consultant based in Washington, D.C. “Saudi Arabia’s oil infrastructure is an attractive target to more than just the Houthis. Anyone hoping to sway oil markets, spook investors, and highlight glaring weaknesses in defenses can take advantage of cheap and easy-to-deploy drones.”

Saudi Assets Targeted

The attacks mark at least the sixth time in four months that Saudi energy facilities or tankers carrying the kingdom’s oil have been targeted. The bombings of ships near the Strait of Hormuz and of Saudi pipelines in May and June served as warnings of the vulnerability of supplies even if they didn’t cause significant cuts in shipments. The weekend attack, by contrast, forced an immediate halt in 5.7 million barrels of daily production.

Cyber attacks, another element of asymmetric warfare, also pose a risk. Saudi Arabia blamed unidentified people based outside the country for sending a virus that compromised Aramco’s computer network in August 2012. Although the virus had no effect on output of crude oil and refined products, the incident highlighted Aramco’s vulnerability to cyber attacks.

Yemen’s Houthis have previously targeted Saudi pipelines and refineries in attacks over the past year. In other strikes against Aramco facilities, guards repulsed a 2006 al-Qaeda attack on Abqaiq, and bombings at residential towers near Aramco’s headquarters in Dhahran on the country’s eastern coast caused deaths and damage.

U.S. President Donald Trump has considered allowing Iran to sell some oil in return for concessions on its nuclear program. That could bring more oil to market, though the U.S. blaming of Iran for the latest attacks on Saudi facilities complicates that scenario.

“Iran is already using this as an opportunity to claim that it will step up massive oil production once sanctions are lifted,” Rodban said. Iran is “poking at Trump where he is most sensitive -- on the economy -- which would suffer if oil prices rise on a major Saudi output drop for any sustained period. ”