Riyadh looks at worst-case scenario as oil prices threaten to hit USD 180

Oil could be on its way into “uncharted territory” — and it may not be good news for Saudi Arabia, prompting the government to reportedly model a worst-case scenario that assumes oil at USD 180 / bbl amid persistent disruptions.

Higher oil prices could be a short-term boon for the kingdom’s balance sheet, as it will be able to export well over half the pre-war levels. “If the oil price averages over USD 140 / bbl, then it’s a net benefit,” Gulf analyst at GlobalPartners Justin Alexander tells EnterpriseAM.

It’s all about how long the Hormuz closure is going to last. “I don’t think USD 150 is out of the question in another month […] You start talking about June, I’ll give you USD 180,” CIBC Private Wealth Senior Energy Trader Rebecca Babin told the Journal.

But the favorable impact would be short-lived. Saudi officials are reportedly concerned the volatility could tip the global economy into recession or trigger a lasting demand hit as consumers cut back. For the medium term, Alexander anticipates higher prices for a longer period, driven by the risk premium and reduced global reserves.

AND- Surging oil means the end of cheap energy and factory inputs, Wolfgang Lehmacher, former head of supply chain and transport industries at the World Economic Forum, tells EnterpriseAM. “A probable USD 8-12 / gallon gas price kills spending and spurs electric cars. Gulf aluminum plants will close without shipping from Hormuz. World trade growth will slow as costs soar,” he added.

IN CONTEXT- Saudi Arabia has cut output by some 2 mn bbl / d since the closure of Hormuz last month, with Saudi Aramco’s CEO Amin Nasser raising alarm bells over “the biggest crisis the region’s oil and gas industry has faced.” The ongoing conflict has already withheld mns of barrels from the global supply, with prices doubling since the war began last month. This could all be exacerbated by the destruction of energy infrastructure on both sides of the war, particularly as Riyadh’s alternative oil export route was already targeted right before Eid.

Pricing tightrope: Aramco is trying to price crude accurately while preventing global consumers from putting their pencils down and slashing oil use for good. The company has already cut its crude supply to Asian buyers for April for a second month running.

What’s next?

All eyes are on 2 April, when Aramco is due to release its net official selling prices. Until then, modelers are racing to identify the breaking point — the price at which gasoline demand starts to collapse and industrial activity becomes uneconomic.

Supply crunch ahead? Saudi light crude is being offloaded to Asian purchasers via Yanbu port for around USD 125 / bbl. We’re expecting to see physical shortage weigh heavier next week, as extra oil in storage –– a portion of which was shipped out of the Gulf prior to the war –– is used up.