News broke on Saturday of a fire burning through the Hijra Khurais oil field and a Saudi Aramco facility in Abqaiq, Saudi Arabia. While the cause was not immediately known, the Wall Street Journal is now reporting that the blaze came as a result of coordinated drone strikes.
Iranian-backed Houthi rebels based out of Yemen have claimed responsibility for the attack, which has forced Saudi Arabia to shut down nearly half of its total crude oil productions. The shutdown will see losses of about 5 million barrels of crude per day or 5% of the world’s total daily production. According to the WSJ, Saudi Arabia produces 9.8 million barrels of crude per day.
Houthi Rebels Increasing Attacks Inside Saudi Kingdom in Recent Months
In recent months, Saudi Arabia has seen an increase in attacks from the Houthi rebels based out of Yemen and even Iraq, on other oil & gas assets, airports, and other civilian locations. However, the latest attacks have had the most devastating impact. Saudi Arabia and Houthi rebels have been locked in a deadly four-year war, which appears to be nearing a point of potential escalation.
A Houthi spokesman noted the latest Saudi attack involved ten drones. “We promise the Saudi regime that our future operations will expand and be more painful as long as its aggression and siege continue,” detailed the spokesman.
Latest Attack on Middle East Oil Infrastructure Could Result in Spike in Oil Volatility
Despite other small disruptions and rebel attempts to sabotage Saudi oil infrastructure and shipping tankers, crude oil has largely not seen any major volatility. WTI and Brent crude oil spiked to their highest levels in May 2019, after underwater mines were used in an attempt to damage or destroy Saudi oil tankers in the Gulf of Oman. However, crude oil prices had since pulled back to the $55 level in WTI and $60-65 range for Brent.
After Saturday’s attack, oil prices could see renewed volatility, as the drone strike represents the most disruptive event to the oil markets by the rebels. Outside of the direct impact on oil production, tensions in the Middle East will only continue to rise, as Saudi Arabia, the United States, the United Arab Emirates, and others place more pressure on Iran for its perceived role. Rising tensions in the Middle East have historically led to increases in oil volatility.
American and Saudi officials have long stated that the Houthis are being financed and armed by Iran, which the country has continuously denied. However, recent American sanctions on Iran have absolutely crippled the country’s oil industry and, in turn, sent the Iranian economy in uncertainty.