Attacks on Saudi Aramco oil facilities - what will it mean for consumers?

New York - The attack on Saudi facilities on Saturday caused the biggest oil supply disruption for more than 50 years. Here is what it could mean for consumers:

Where will I feel the cost increase?

Consumers around the world could see costs rise for products ranging from gasoline and diesel to home heating costs and air fares, after this weekend’s attacks caused a spike in global oil prices. As the cost of transportation rises, that could mean shipments of other goods, such as groceries, could also increase in the coming months.

How does the price of oil factor into the Diesel and Gasoline price? 

Crude oil is refined into fuel including gasoline and diesel. When crude prices rise, the cost of fuel rises with it. Other factors are also important in the retail price, such as local taxes and fuel standard regulations. Crude, however, is the biggest factor.

“Crude accounts for 50% of the (U.S.) retail price, so as crude goes up, so does the retail,” said American Automobile Association spokeswoman Jeanette Casselano.

Why is Saudi Arabia so important to this equation?

Saudi Arabia is the world’s biggest crude exporter and one of the top producers. The attack removed half of its output- 5.7 million barrels per day (bpd), or the equivalent to 5 percent of global supplies.

Saudi Arabia is also the holder of nearly all the world’s spare oil capacity - which means the ability to increase output quickly to compensate for any problems in supply worldwide. So any further large supply disruption will impact oil supply and prices more than they would have done if Saudi Arabia still had spare capacity.

Before the attack, Saudi Arabia was shipping 7 million barrels of oil around the world daily, much of it to Asian buyers.

When will prices start to rise? 

Very soon. Prices at the pump respond very quickly to moves in futures markets, which have risen sharply on Monday in response to the attacks.

In the United States, drivers could see gasoline prices at the pump start to rise as early as this week and prices could climb as much as 25 cents this month. The U.S. gasoline RBc1 and diesel futures HOc1 contracts on the New York Mercantile Exchange rose more than 12% and 10%, respectively, on Monday.

How can the rising price of fuel raise other costs?

Prices for fuel, especially diesel, which fuels heavier-duty vehicles such as trucks and farming equipment, are expected to rise. That will affect transportation costs for companies to ship products from the factory and the farm.

Manufacturing industries that require a lot of energy supply like automotive production and chemicals could also pass on costs if their expenses increase.

Consumers, therefore, could see costs increase for items at their grocery stores like fresh produce, which often has to be shipped from other regions.

Fuel price increases are expected throughout the world’s major economies, with countries in Asia particularly sensitive to spikes because of their energy-intensive manufacturing industry, said John Kilduff, a partner at Again Capital in New York.

Depending on how long Saudi exports are affected, consumers could also see increased ticket prices for air travel because of a price premium on jet fuel for aircraft, said Phil Flynn, an analyst at Price Futures Group in Chicago.

Home heating oil could also get a bump in price, at a time when demand is starting to rise in the United States and Europe as temperatures drop ahead of winter.

Why is the price expected to rise? Isn't there any oil in storage world wide? 

Yes, there is. Members of the Paris-based International Energy Administration are required to keep at least 90 days of crude oil and/or products imports in storage in case of situations like this. The United States has already said it could use its petroleum reserves if needed, and Saudi Arabia also has enough storage to cover exports for a certain period of time.

However, markets globally are still affected because it is unclear how long Saudi Arabia will need to repair the damage and resume exports.

Aren't gasoline prices relatively low right now anyway? 

Yes. The average price for a regular gallon of gasoline is currently $2.56, according to the American Automotive Association. That’s far short of levels typically associated with reduced spending from consumers. In 2008, amid a global economic downturn, a surge in oil prices pushed the average gallon of gasoline to a record $4.11, according to AAA.

Impact of Saudi oil outage on crude, product markets

Attacks on Saudi Arabian oil facilities on Saturday shut down about 5.7 million barrels per day (bpd) of crude production, sending global oil prices soaring.

A prolonged shutdown - at current levels, more than 5% of global oil supply - could lead to increased fuel prices for consumers. Saudi Arabia is the world's biggest oil exporter, normally shipping more than 7 million barrels every day.

The key Abqaiq processing plant was hit at the weekend. It processes crude from the Ghawar, Shaybah and Khurais fields that produce Arab Light or Arab Extra Light.

A return to normal production may take months, two sources briefed on the matter said on Monday. Saudi Arabia's energy minister, Prince Abdulaziz bin Salman, will hold a news conference on Tuesday.

The attacks have also hit Saudi refining capacity, but the extent is unknown. At least two refineries have had to reduce capacity.

Brent oil futures closed nearly 15% higher on Monday but declined in early Tuesday trading.

The following outlines the impact on crude and product markets so far:

CRUDE

PetroChina said its light crude loadings for October would be delayed by 10 days.

At least five Asian refiners, including two in India, are set to receive their full allocated volumes into October.

Saudi Arabia said it would continue normal exports this week from storage, but some deliveries have been disrupted.

Buyers of Saudi crude are being asked to take heavier grades, several trading sources said, including Indian Oil Corp and PetroChina in September.

Saudi Arabia was forced to shut its pipeline to Bahrain.

The conduit supplies 220,000-230,000 bpd of Arab Light to the 267,000-bpd Sitra refinery.

Bahrain's state oil firm was scrambling to have ships bring about 2 million barrels of oil from the Saudi port of Ras Tanura to its refinery.

REFINED PRODUCTS

Saudi Aramco will delay its liquefied petroleum gas (LPG) October cargo nomination announcements to Sept. 18 from Sept.

16, three industry sources said. China, Japan and South Korea are the top three LPG importers in Asia.

Saudi Aramco's trading arm is seeking oil products for prompt delivery following Saturday's attacks.

Aramco Trading Co, the trading arm of Saudi Aramco, is making enquiries to buy diesel for prompt delivery, two trade sources said. Saudi Arabia is typically a net exporter of diesel.

At least two refined product tankers that were due to load at Saudi Arabia's Jubail port in mid to late September have been diverted, data from analytics firm Vortexa showed.

Operations at Saudi Arabia's SASREF and PetroRabigh oil and petrochemical refineries have been slashed by up to 40%, two trading sources said, citing oil research firm IIR.

STRATEGIC RESERVES

Energy Secretary Rick Perry said on Tuesday the United States was taking a wait-and-see approach on whether to tap its Strategic Petroleum Reserve.

US President Donald Trump on Sunday authorised the release of strategic reserves.

South Korea said it would consider releasing oil from its strategic reserves if circumstances around crude imports worsened.

The German government said its supply of oil was not affected by the attacks and any decision to release strategic reserves must be made jointly with members of the International Energy Agency.