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Should Markets Worry About Falling Saudi Oil Inventories?

Robert Rapier

Bloomberg is reporting that Saudi Aramco has restored oil production levels at the crude-processing plants at Abqaiq and at the Khurais oil field. Multiple reports that Saudi’s production would be back online quickly have helped push oil prices back down to where they were prior to the September 14 attacks.

Maximum production capacity still isn’t at pre-attack levels, and Aramco said that won’t be restored until late-November. Presently, Abqaiq capacity has been restored to 4.9 million barrels a day (BPD), versus a pre-attack capacity of 5.5 million BPD. Khurais is operating at 1.3 million BPD, versus a pre-attack capacity of 1.5 million BPD.

Aramco has reportedly continued to supply its customers, in part by drawing down its oil inventories. The inventory draw has been reported upon by Ursa, a geospatial intelligence company. I recently spoke with Ursa’s global energy analyst, Geoff Craig, who explained the company’s capabilities and findings.

Ursa measures tank levels from space using Synthetic Aperture Radar (SAR) satellites. The data is then processed with a machine learning algorithm. The company also reports on flaring activity. These two pieces of information can provide a picture of Saudi Aramco’s activities.

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Geoff explained that three sites — Ras Tanura, Yanbu and Khafji — contain most of Saudi Arabia’s domestic crude oil inventories. In the month prior to the attack, inventories were relatively stable. But the two weeks following the attacks saw inventories at these three sites fall by more than 20 percent.

Saudi crude inventories at Ras Tanura, Yanbu and Khafji.

In addition to drawing down inventories Aramco has reportedly been sourcing crude oil from nearby countries like Kuwait, and it has been offering some customers heavy crude instead of the light crude they normally receive.

What are the implications? The oil markets seem to have already discounted the geopolitical risk. Falling inventories don’t seem to have concerned the market either, although Ursa’s latest measurement showed that inventories finally increased at Ras Tanura and Yanbu.

Market intelligence provider Wood Mackenzie told the Wall Street Journal this week “In the past the Saudis have always been able to step up to the plate and meet what’s missing. This is a different situation because the country with the greatest spare capacity is the one hampered.” They added on Twitter “If there are any other outages, we are up a creek without a paddle, as they say.”

That heightened risk certainly isn’t reflected in the current price of oil.

By Robert Rapier

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