Saudi attacks could push European oil supply closer to Russia

  • Oil prices spiked more than 10% Monday following the drone attack against Saudi interests over the weekend.
  • If there is an extended Saudi outage that lasts more than six weeks, prices of Brent crude could rise about $75, Goldman Sachs warned Monday.
  • The EU imports 6.6% of its crude oil from Saudi Arabia and 27.3% from Russia, but it could boost its energy dependence on Russia if supplies from the kingdom stall.

Although Europe's energy dependence on Saudi Arabia is very small, the effects of a prolonged decline in oil production could have a serious impact on European economies. The obvious impact will be the increased fuel-supply costs and the consequent effect on oil and gas prices, but the most serious political side effect could be an increase in the EU's energy dependence from Russia.

The stability of the EU's energy supply is already fragile, as most of the fuel imports to the European continent come from a few countries. In 2018 almost 27.3% of the EU's crude oil imports came from Russia, and a small proportion, 6.6%, came from Saudi Arabia.

From 2006 to 2016, EU imports of Saudi crude oil stayed relatively stable, accounting for an average of 5% of total oil imports. U.S. oil exports to Europe are today at similar levels. U.S. supplies to Europe doubled to 430,000 bpd in 2018, according to Refinitiv Eikon flows data. That represented 6% of overall imports.

According to the European Statistical Authority, the EU runs a trade surplus with Saudi Arabia of €11 billion ($12.1 billion), and a quarter of Saudi Arabia's imports come from the EU. While the EU is an important destination for Saudi goods, taking 11% of the kingdom's non-oil exports, Saudi Arabia is the EU's 13th-largest trade partner in goods, equivalent to just 1.5% of total trade.

Crude-oil deliveries to Europe

Saudi Aramco currently has more than 3 million barrels a month of oil supply and product swap arrangements in Europe. The company has deals with Poland's PKN Orlen, Greece's Motor Oil Hellas and Egypt's Midore.

"In the short run, we do not expect the shutdown of 5.7 millions of barrels a day of the Saudi oil production to directly affect European oil supply, because Saudi Arabia has already activated its strategic reserves to cover the deficit. However, the latest indications from the kingdom that fixing the outage could take months would likely increase the risk for the crude-oil deliveries to Europe," Martin Vladimirov, an energy security analyst at the Center for the Study of Democracy and a former oil consultant in Saudi Arabia, told CNBC.

He stressed that Russia can exploit this situation in order to increase its oil exports to the EU. "We could expect Russia to step up exports to cover any potential physical deficit for the European market," he said.

According to Vladimirov, the geopolitical risk in the market depends on whether tensions rise on the Arabian Peninsula. This could have another spillover effect: rising gas prices. As he explains, if oil prices remain elevated over the next couple of months, natural gas prices could rise in the winter and spring of 2020. That's because gas prices are often linked to long-term oil-indexed contracts.

For now, European gas market officials are taking a wait-and-see approach. Dr. Nikolaos Farantouris, chair of the Legal Affairs Committee of EUROGAS, the association representing the European gas wholesale, retail and distribution sectors, says "it's too early to make estimates about how the situation will evolve and how prices will move."

According to Goldman Sachs, a very short outage in Aramco's production — a week, for example — would likely drive long-dated prices higher to reflect a growing risk premium. Such a price impact could likely be an increase of $3 to $5 per barrel. But an outage at current levels of two to six weeks would, in addition to this move in long-dated prices, see a steepening of the Brent forward curve of $2 to $9 per barrel, respectively. In total the expected price move would be between $5 and $14 per barrel, commensurate to the length of the outage.

On Monday shares of Motor Oil Hellas, which supplies oil from Aramco, gained 5.49% in the Greek stock market. Nikos Chryssochoidis, managing director of N. Chryssochoidis Stock Brokerage firm, told CNBC that the shares surge may indicate the investors believe the company's oil reserves have been built at much lower prices in relation to current international oil prices.

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