A swarm of drones set off a chain of explosions the Saudi Aramco oil production facilities at Abqaiq and Khurais in eastern Saudi Arabia on 14 September 2019. It is important to note that the Abqaiq facility is not a refinery or a petrochemicals plant, but is a crude separating facility where impurities like hydrogen sulphide are removed from the crude prior to export. The Iran-backed Houthi militia in neighbouring Yemen, have taken responsibility for the attack. The Houthis have tried to attack Saudi oil installations before, and have launched missile attacks on Saudi airports. The success of this drone strike is a serious escalation, and one that the Saudis are going to be enraged by.
Initial reports suggest that damage is extensive and that at least 5.7 million barrels of crude oil per day (approximately 5% of global supply) will be off the market. There have been further contradictory reports as to how long this supply disruption will last. Some reports suggest that normal operations will resume this week, others suggest that normal operations will take at least a couple of weeks, perhaps even months.
So what is the context for these attacks?
These attacks are a product of a civil war in Yemen between Saudi-backed elements and Iranian-backed elements. The conflict is a lot more complicated than a simple power struggle between Iran and Saudi Arabia, but this is the context in which other external actors like Israel and the United States of America see it – as a Sunni vs Shia struggle in the Gulf region. The demonstrated ability of Houthis to hit Saudi oil infrastructure might prompt the Saudis to take direct action against Iran for the first time, and this would mean anall out war in the Gulf. With Israel and the United States firmly backing Saudi Arabia, we can expect Iran to seek stronger ties with Russia and China. US President Donald Trump has tweeted that the US is ready to support Saudi actions once they receive confirmation of who the Saudis believe are responsible. This has the potential to escalate the issue even further and unlike during the Cuban Missile Crisis, in all the actors concerned, leadership is not as cool-headed.
So how does this impact Nigeria?
First, given what has happened in Saudi Arabia, OPEC is unlikely to enforce the production cuts until the Saudis are back in the market. However, internal instability and insecurity mean that Nigeria’s ability to take advantage of any major conflict in the Middle East is very limited. The resilience of Boko Haram and assorted insurgents in the Niger Delta mean that Nigeria is not at all well placed to step into any supply gap created by a Middle East war as it was able to do during the Gulf War in 1991.
In the short termhowever, oil prices are likely to jump above $70 per barrel. Nigeria’s strategy of essentially accommodating theft of what amounts to almost 10% of daily official production numbers by the actors in the Niger Delta has guaranteed the unbroken flow of supply from the Nigerian oil fields in the delta. So the country stands to gain a bit if this holds. However, given that the US has said it would release oil from its strategic reserves in order to balance supply, there will be no windfall for Nigeria.
As far as the global crude oil markets are concerned, OPEC is fading into irrelevance and only three major producers matter:
1. America’s frackers – who have upended the market. Crude oil prices should have been a lot higher, but for the influx of loads of sweet light shale oil from the US.
2. Russia – a major producer, but whose fields are being rapidly depleted and;
3. Saudi Arabia – the market mover. The Saudis have determined the general nature of the crude oil market several times in the past by either steeply cutting production or opening the taps. This time it is different.
Taking 5.7 million barrels of Saudi crude oil off the market is unprecedented. There is no easy medium to long-term replacement if 5.7 million barrels of crude (half of Saudi production) is taken off the market. American actions to release from their reserves will only be a palliative measure. So the question is, how long will this disruption last? The answer to that question is that we don’t know for now. The Saudis have promised to provide more information on this on Tuesday the 17th of September.
There are a couple of scenarios:
1. If supply disruptions last a couple of weeks, a combination of a release of excess storage by the Saudis and the Americans might be able to stabilise crude oil prices. (remember that Donald Trump is committed to low oil prices).
2. If supply disruptions and hence shortfalls last a lot longer (like a couple of months), there are likely to be significant gains in crude oil prices, which will be to Nigeria’s benefit, but it remains to be seen how long these shortfalls will last given that swing producers such as America’s frackers could rapidly ramp up supply to meet demand shortfalls.
3. An escalation due to retaliation by the Saudis backed by the US on Iran will mean that the disruptions will last significantly longer, much longer than the palliatives can moderate. On the Iranian side, the Chinese have a strategic interest in ensuring the continued supply of Iranian oil and hence may weigh in as well. This has the potential for drawing out the conflict or moderating influence on how the actors escalate issues. This unlikely scenario may provide a similar outcome to the Gulf War Windfall of the 1990s which Nigeria mismanaged.
In summary, the best-case scenario for Nigeria is a minor uptick in crude oil prices, but nothing of the scale of the “Gulf Oil Windfall” of 1990/1991. However, things could change if retaliation by US/Saudi Arabia on Iran sparks an oil out war in the Gulf. We do not think this is likely as there is limited appetite for the kind of crisis that could not just lead to a prolonged period of high oil prices, but a trigger global recession or even a depression.