Petrol, Diesel Prices To Rise Due To Saudi Drone Strikes

Petrol and diesel prices may go up sharply in coming days due to the disruption of crude production in Saudi Arabia because of drone attacks on its two key oil facilities, according to industry experts. They added that the disruption in supply may keep oil prices elevated in the near term and that a $10 per barrel increase may translate to Rs 5-6 per liter rise in petrol and diesel prices in the country.

Emkay Global said that historically, prices have jumped over 10 per cent after such major events; hence, a $5-7 per barrel jump can happen, although it may stabilise if the affected production is brought back quickly.  A $5-7 per barrel jump could lead to price increase of Rs 3-4 per liter for petrol and diesel.

There was a major drone attack on two oil facilities in eastern Saudi Arabia early morning on Saturday by Yemeni Houthi rebels, causing severe fire in the Abqaiq and Khurais oil processing plants, which have capacities of 7mb/d (million barrels per day) and 1mb/d respectively. 

According to sources, supplies have been disrupted, with two citing a 5 mb/d impact. This is over half of the Saudi’s current production of 9.8mb/d and five per cent of global oil supplies, according to a research note by Emkay Global. It added that a five per cent hit on global oil supplies is significant and oil prices are expected to spike.

According to Kotak Securities, the “largest-ever disruption” of crude production in Saudi Arabia amid drone attacks on its key facilities may keep oil prices elevated in the near term. It added that a $10 per barrel rise in global crude and product prices may require OMCs to increase retail price of diesel and petrol by Rs 5-6 per liter in the following fortnight.

Sumit Pokharna, Vice President Research (Oil and Gas), Kotak Securities, said that India’s crude oil import dependence to oil consumption is over 80 per cent (FY19) which makes it highly sensitive to crude oil price movement. 

“Any disruption in crude oil supply from Saudi will have material impact on the refiners. Replacing Saudi Arabia oil supply immediately will be a big challenge... India has discussed possibilities of increasing crude oil purchases from Russia. In FY19, Indian refiners imported 2.2 million tons of Russian oil. We believe higher crude oil prices have double whammy on Indian economy. Higher current account deficit and weaker currency (making imports costlier),” he said.

According to Kotak Securities, global oil supplies may be adequately met through large inventories and strategic reserves. However, moderation in oil prices will depend on full restoration of Saudi’s production, which may at least take a few weeks.

“Any further escalation of geopolitical tensions in the middle-east region may add to the woes. Spike in crude prices, even if temporary, will be negative for downstream OMCs and positive for upstream PSUs and GAIL,” it said.

Priyank Upadhyay, AVP Commodity, SSJ Finance & Securities, said the possibility of a US military escalation remains a key. 

“Any escalation from US and Saudi Arabia may bring oil prices (NYMEX) to $68-70 per barrel. However in the case of De-escalation, we could see a cool off in oil prices towards $59-57 levels (NYMEX),” he said.

Some sources say, the production halt is a preventive measure and in 48 hours operations could normalize. “However, the concern that important Saudi oil facilities are now vulnerable to attacks by rebels would increase the geopolitical risk premium on oil prices, it added. Saudi Arabia and its allies may also retaliate, leading to more tensions and a broader clash with Iran can be severe,” Emkay Global said.