Global crude oil market opened 19% higher on Monday, its biggest intraday jump in 28 years. The prices skyrocketed after a drone attack at Saudi Aramco’s most important processing plant on Saturday which had wiped out nearly 5% of the global crude oil supplies.
Following the attack, US President Donald Trump on Sunday stated that the US was "locked and loaded" for a potential response to the attack on Saudi Arabia's oil facilities. The Trump administration believes Houthi rebels backed by Iran was behind the attack. Iranian foreign ministry dismissed this as “pointless”.
The attack further deteriorated the already soured relations between the US and Iran. Following the attack, Saudi officials reported an output decline by 5.7 million bpd which totaled around 5% of global crude oil supplies. The US had opened the strategic oil reserves to fill in the shortfall in the global crude supplies. Saudi Arabia also suggested withdrawals from its reserve crude stocks which stood at 188 million bbl in June to compensate for the attack.
The market is currently waiting for Saudi Aramco's update which would provide extends of supply outage. Saudi Aramco has not mentioned any fixed timeline for the resumption of supplies but indicated that achieving full capacity could take weeks.
Goldman Sachs believes if the supply outrage continues even for a shorter duration of 1-2 week, it could result in risk of premiums growing higher and price rice of $3-$5/ bbl. The prices could be higher by $10-$15/bbl if it continues for 3-6 weeks. If it extends for over three months, Brent prices could stay well above $75/bbl which will make the US shale players boost their drilling activity in response to supply deficit.
Currently, the global markets are vulnerable to surge in crude oil prices as it comes at a time when the markets are already witnessing weak economic outlook due to the ongoing US and China trade war.
How it impacts India?
Saudi Arabia is India's second largest supplier of crude and cooking gas. India imports 83% of its crude requirement, the third biggest importer of oil globally. Data shows that India had imported 4.5 million barrels a day during April-July period. In an interview to a TV channel, RBI governor Shaktikanta Das said the attack on Saudi Arabia's important oil facilities will have a bearing on India's current account and fiscal deficit if oil prices continue to surge. As per the recent government data, India's trade deficit stood at $13.45 billion in August. The Indian rupee could be the biggest causality among the world currencies. On Monday, the Indian rupee declined 68 paise to 71.60 against the greenback amid concerns that the crude oil prices will surge in the days to come. Further, petroleum prices in India could see a spike on the back of surge in global prices. (The author is a fundamental research analyst at Karvy Comtrade Limited)