Bloomberg News

Saudi Fire News Oil-Price Swing Shows Supply Vulnerable as Sanctions Loom

March 02, 2012

Oil’s 4.8-percent price swing yesterday on reports of a fire in Saudi Arabia, the world’s biggest crude exporter, show the market’s vulnerability to supply disruptions as sanctions hamper sales from Iran.

Brent crude rallied to as much as $128.40 a barrel late yesterday, the highest since July 2008, after Twitter messages, internet blogs and an Iranian state-run news channel reported that an explosion destroyed a pipeline in eastern Saudi Arabia, near the Ras Tanura refinery. The kingdom’s Interior Ministry later denied any sabotage to its oil facilities, and prices declined, sinking further today to as low as $123.90 on the ICE Futures Europe exchange in London.

The reaction highlighted “the reduced ability of the market to absorb supply shocks or mere headlines of supply shocks, given the limited spare capacity and inventory buffers,” Amrita Sen, an analyst at Barclays Plc in London said in a note to investors today.

Crude prices have risen 16 percent this year as the European Union imposes an oil embargo on Iran, which the International Energy Agency said may affect daily supply of 600,000 to 1 million barrels. OPEC has an “effective” spare oil production capacity of 2.82 million barrels a day, of which 72 percent is in Saudi Arabia, the IEA said in a Feb. 10 report. The figure excludes Iraq, Nigeria, Venezuela and Libya.

Brent traded between $122.49 and $128.40 yesterday, a 4.8 percent swing, and was at $124.10 at 3:02 p.m. in London today.

“Brent is back under $125 at the time of writing, but we’ve had a good demonstration of how nervous the market is at the moment, and how quick shorts will be to cover,” Philip Wiper, an analyst at London broker PVM Oil Associates Ltd., said in an e-mailed report.

Abqaiq Memory

Concern about Saudi supply has previously caused jitters in the market. On Feb. 24, 2006, Brent crude rose as much as $2.33 a barrel or 3.9 percent to $62.87 a barrel after Saudi Arabian forces repelled a suicide attack on the Abqaiq processing center, which handled about 6 million barrels a day. Abqaiq sends oil by pipeline to Ras Tanura on the Persian Gulf coast.

The oil-export terminal in Ras Tanura was operating normally today, according to Gulf Agency Co., a port agent.

“There is absolutely no disruption whatsoever to oil supply, ports, refineries, anything,” Dan Hjalmarsson, a vice president responsible for the Middle East region at GAC. He spoke from Dubai after checking with the general manager in Saudi Arabia. “It’s business as usual.”

Phonecalls to the Saudi Ports Authority office in Riyadh and to the Ras Tanura Port today, a weekend, were unanswered.

No Sabotage

Saudi Arabia experienced no sabotage at its oil facilities in the Qatif area, Major General Mansour Al-Turki, a spokesman for the Interior Ministry, said late yesterday by phone.

A fire occurred in an industrial area in the town of Safwa in the Shiite-dominated Qatif area near Ras Tanura, a person with knowledge of the situation said late yesterday. The blaze didn’t damage the refinery or any pipeline in the area, said two people with knowledge of the situation who declined to be identified.

Prices rallied yesterday on the basis of internet reports and after Iran’s Press TV reported that an explosion destroyed oil pipelines in eastern Saudi Arabia. Today, the same news agency reported mass participation in Iranian parliamentary elections. Saudi Arabia and Iran are the two biggest producers in the Organization of Petroleum Exporting Countries and regional political rivals.

Sri Lanka, dependent on Iran for more than 90 percent of its oil requirements, was today the latest country to say it will turn to other suppliers amid escalating sanctions.

“After the imposition of sanctions by the U.S. and EU on Iran, we are exploring the possibility of increasing imports from Aramco,” Oil Minister Susil Premajayantha said in a telephone interview from Colombo, referring to Saudi Arabia’s state-run oil company. “We have already written to them.”

To contact the reporter on this story: Rupert Rowling in London at rrowling@bloomberg.net Wael Mahdi in Kuwait at wmahdi@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


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