16 September 2019

AFFINITY SHIPPING

Research Note
Reaction to the attacks in Saudi Arabia

STRICTLY PRIVATE AND CONFIDENTIAL

 What happened and how will it impact the oil market?
On Saturday, drone attacks conducted by Houthi rebels in Saudi Arabia resulted in oil prices’ rocketing, in what is
being described as the “single-worst disruption in oil markets ever”. Prices shot up by 20 per cent in early trading on
Monday, the biggest intra-day surge since trading began in 1991, after Saudi’s energy ministry revealed that 5.7 Mn
bpd of crude oil production had been affected. Some reports are saying that as much as 5 Mn bpd could be restored
imminently, but these are unconfirmed.

The attacks were reportedly on the world’s “most important oil processing plant”, and the effects will be both
immediate and far-reaching.

According to US declassified satellite images, there were approximately 17 different points of impact on key
infrastructure. At first, it was claimed that it would take weeks before Saudi crude production returns to normal, but
now “months” is being mooted.

As mentioned, oil prices have leapt on the news. At the time of writing, Brent crude is up to USD 65.37 per barrel, an
8.5 per cent increase on Monday morning, while WTI is at USD 59.1 per barrel, a 7.75 per cent increase.

USD/Barrel Crude Oil Prices (USD/Barrel) USD/Barrel

68 7

66
6
64
5
62

60 4

58 3
56
2
54
1
52

50 0

Brent WTI Brent-WTI Arb

Markets are currently awaiting Saudi Aramco’s verdict on the extent of the damage. The longer the outages continue,
the more upward pressure will be placed on oil prices.

A number of different banks and sources are currently trying to predict the impact on oil prices. According to OilPrice,
a shortage of a week could result in an increase of between USD 3 – 5 per barrel.
An outage lasting between two – six weeks could inflate prices by between USD 5 and 14 per barrel.
Longer than six weeks and governments would release SPR to help balance the markets, pushing prices above USD
75 per barrel.
If the outage is 4 Mn bpd and lasts for longer than three months, prices would rise above USD 75 per barrel, which
would result in kick-starting shale production, just as the US is upgrading and expanding its pipeline capacity.

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PRIVATE & CONFIDENTIAL
Impact on Shipping – VLCCs gain in the short term…but how about in the long run?
• The immediate impact on the shipping markets will be determined by the volume of production which has been
knocked offline.
• On the one hand, VLCCs will be hit by a sudden lack of cargo volumes out of the AG, as VLCC cargoes account for
89 per cent of all Saudi Arabia’s crude exports. Cargo volumes will be strongly hit, resulting in weaker demand in
the AG. It is estimated that there will be a fall in demand of between 2 – 3 VLCCs each day.
• However, the added risk of war between the US and Iran has immediately boosted rates in both the AG and USG,
so any developments in tensions will also be a factor going forward.
• Asia is Saudi Arabia’s biggest customer, with China, India, Japan, and South Korea its most prolific buyers.
Following the loss of Iran’s supply, these countries have already had to source more crude from elsewhere,
notably Saudi Arabia, the US, South America, and Russia.

Saudi Arabia Crude Oil Exports by Vessel Type (Mn bpd)

10

Aframax Suezmax VLCC

Saudi Arabia Crude Oil Exports by Destination (Mn bpd)

8

0
Oct-18
Oct-17

Dec-17

Dec-18
Feb-17

Feb-19
Apr-17
May-17

Jul-17

Nov-17

Feb-18

Nov-18
Jan-17

Mar-17

Aug-17
Sep-17

Apr-18
May-18

Jul-18

Apr-19
May-19

Jul-19
Jan-18

Aug-18
Mar-18

Jan-19

Aug-19
Sep-18

Mar-19

Sep-19
Jun-17

Jun-18

Jun-19

China India Rest of Asia Europe North America Rest of the World

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PRIVATE & CONFIDENTIAL
Impact on Shipping – Aframax and Suezmax volumes also set to be affected
• The Abqaiq field supplies the ports both on the Red Sea and Ras Tanura in the AG., thus export volumes from both
regions are set to be negatively impacted.
• The pipeline linking the Abqaiq field to the Red Sea ports has a nameplate capacity of 5 Mn bpd. Yanbu exports
around 500,000 bpd on VLCCs, with Suezmaxes loading roughly 100,000 bpd, and typically targets western
markets.
• Moreover, around 10 per cent of Saudi’s crude exports to Europe travels through the pipeline to the Red Sea.
Saudi’s refineries in the region also rely on crude from Abqaiq, so refining throughput will also be negatively
impacted. Aframaxes also load DPP in Yanbu in small quantities, and these volumes will fall.
• Saudi crude is also typically transported up to Sidi Kerir for export via the Sumed pipeline. From there, Aframaxes
and Suezmaxes transport through to Europe. These volumes, too, will be negatively impacted.
• It is therefore down to Saudi where they wish to send their remaining volumes of crude. The oil kingdom has been
exporting more and more to both China and India in recent months, so it is likely that it will try to preserve as much
of its market share as possible.
• Meanwhile, Europe will need to find alternate suppliers, with the US the probable choice. European refineries have
been stepping up their imports of US crude, as they are less complex and require light grades, such as those
produced in the US.
• This would provide positive tonne-mile demand growth across all tanker sizebands.

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 Impact on Shipping – Oil price volatility & what has it meant for rates in the past?
Gulf War in 1990-1991 impact on oil and tankers Rotterdam HSFO Futures
300
70,000 40.000
290
60,000 35.000 HSFO
280
50,000 30.000 Last week

USD/ barrel
270
USD/ Day

25.000
40,000
20.000 260
30,000
15.000 250
20,000 10.000 240
10,000 5.000 230
0 0.000
1991-03-01 220
1991-05-01
1991-07-01
1991-09-01
1991-11-01
1990-01-01
1990-03-01
1990-05-01
1990-07-01
1990-09-01
1990-11-01
1991-01-01

210
200

MR Clean Earnings VLCC Earnings WTI

WTI Crude Oil Prices 1970-2019

Long run prices influenced by Supply, Demand and Geopolitics…
US Shale
China Arab Oil
OECD Asian Growth Great Spring
Arab Oil Iranian Iran/Iraq Expansion
160 Demand Falls Gulf Economic PDVSA Commodity Financial Asia
Embargo Revolution War Saudi
Non-OPEC up War Shock 9/11 Strike Super Cycle Crash Demand
Volumes

140

120

100
Nominal Price US$/barrel

80

60

40

20

0
1977

1984

2003
1970
1971
1972
1973
1974
1975
1976

1978
1979
1980
1981
1982
1983

1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002

2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019

Source(s): St. Louis Fed

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PRIVATE & CONFIDENTIAL
Impact on Shipping – Crude Tanker Summary
• Higher oil prices may deter the likes of China from importing such high volumes of crude oil, which it had been doing to
build up its SPRs, potentially in anticipation of increasing its production of regulation-compliant fuel for IMO 2020.
• The estimated loss of Saudi output equates to 5 per cent of global crude supply, while 25 per cent of Saudi’s exports go
to China (1.7 Mn bpd). Arab Light and other extra light crude grades make up to a third of China’s imports from Saudi.
Other buyers of light grades from Saudi are typically Japan, South Korea and India, who may replace the lost barrels
with US light grades, which would boost tonne-mile demand. Given, however, that the US has limited exporting capacity
on VLCCs, we could see increasing US exports on Suezmaxes and Aframaxes.
• China currently has an estimated 325 Mn barrels in its SPR, which equates to around 33 days of imports.
• While the production cuts could, in theory, be relaxed because of the incident, the other members of Opec+ are unlikely
to be able to make up for Saudi’s shortfall alone. So while cargo volumes may increase from the likes of Iraq, the UAE,
and West African countries, this rise is unlikely to completely offset the loss of Saudi cargoes.
• In the last few months, Japan has been importing more crude from Russia on Aframaxes, increasing to 0.7 Mn T in July,
while Korea has also turned to Russia more heavily in recent months.
• China, meanwhile, has leaned more heavily on West Africa, South America and the US. Now, with the 5 per cent levy on
US crude oil imports in place, China is in a difficult position. West Africa and the other main producers in the Middle East
are constricted by the production cuts, so would be unable to increase production to match this new level of demand.
• South America and Russia, which provided 2.3 Mn T of crude on Aframaxes to China in July, are perhaps best placed to
make up the deficit.
• India will most likely fall back onto the US. Imports have been increasing on VLCCs since the end of last year, and this
is a trend which may continue. In May, India imported 9.3 Mn barrels of crude from the US, which equates to roughly 5
VLCCs, the highest in history. And levels have not dropped substantially since.
• In tonne-mile terms, this would be a positive for the VLCC market, as long as US infrastructure is capable of coping with
the increased demand.
• Saudi Arabia could, in theory, offset some of the loss in production through inventories, but these would almost
certainly fail to make up the whole difference, especially considering that Saudi Arabia has depleted its crude oil stocks
to the lowest levels in 10 years.
• Moreover, should countries be forced to dip into their stocks to offset the loss of Saudi Arabian imports, this could have
a negative impact on floating storage, resulting in yet more pressure on tanker earnings.
• Increasing Brent prices could put further upward pressure on bunker prices. HSFO supply has already been squeezed in
many bunkering hubs ahead of the switch to low sulphur bunkering grades.

US Crude Oil Export Capacity (Mn bpd)

6

0
H2 2015 H1 2016 H2 2016 H1 2017 H2 2017 H1 2018 H2 2018 H1 2019

LOOP St James/New Orleans Nederland/Beaumont Greater Houston Corpus Christi

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PRIVATE & CONFIDENTIAL
Impact on Shipping – Product Tankers to gain?
• Saudi Arabia’s refinery runs will also be impacted, with reported estimates that about 1 Mn bpd of Saudi
Aramco refining operations have been curtailed, releasing medium and heavy crude oil grades for export,
with the state oil company likely to buy significant quantities of gasoline, diesel and possibly fuel oil.
• Product tankers may benefit from the attacks, as a result.
• Saudi Arabia will be forced to import more product to satisfy its domestic demand, while its typical
customers will be forced to look elsewhere.
• In terms of imports, Saudi may turn to its neighbours. The kingdom currently imports very little product,
but the UAE is its biggest current supplier. Should imports rise, it will have little impact on tonne-miles. If,
however, it decides to import from India, which also provides some products, or China, that would be a
boost for tonne-miles.
• Saudi Arabia’s biggest export product markets are Europe and the Far East.
• Europe accounts for roughly 50 per cent of exports, and the US will, again, probably pick up the slack.
This will be a boost for tonne-mile demand on the established TC14 route.
• On the other hand, the buyers in the Far East – namely Korea and Singapore – have been increasing
their product imports from China as of late. China has been producing large surpluses of products
recently, as domestic demand falls, so is well positioned to make up for losses from Saudi Arabia. Again,
this will have little positive impact on tonne-miles.

Saudi Oil Product Exports by Vessel Type (Mn bpd)

1.4

1.2

0.8

0.6

0.4

0.2

LR1 LR2 MR

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could cause markets to depart from their natural/usual
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