The disruption to Saudi oil could last 3 months - a scenario Goldman Sachs says would send oil prices over $75 a barrel

Sad traderA trader watches the screen at his terminal on the floor of the New York Stock Exchange in New York October 15, 2014. REUTERS/Lucas Jackson

  • Goldman Sachs analysts are warning that the Saudi oil crisis could last more than three months in a worst-case scenario, and even if disruption lasts half that time, oil could pass $75 a barrel.
  • The weekend attacks are estimated to have damaged half Saudi's oil supplies, roughly equal to 5% of global supplies.
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Goldman Sachs analysts are warning that in a worst-case scenario, the disruption to Saudi's oil industry could last up to three months and prices could soar to over $75 a barrel.

Oil surged 20% on Monday morning, sending prices to $72 a barrel, later calming to 10.7% rise in Brent crude at $66 a barrel at 1 p.m. in London. Over the weekend, key Saudi oil facilities were hit by strikes, damaging facilities that produce about half of the Kingdom's oil, or about 5% of global supply.

Traders sent text messages from bank and brokerage floors on Monday, speculating how long the disruption would last, with one broker in London saying consensus is at about four to six months for full production to get back on track.

It's "a historically large disruption on critical oil infrastructure and these events represent a sharp escalation in threats to global supply with risks of further attacks," said Damien Courvalin and his team in a note.

Basing its estimates off the 2018 Iranian sanctions and the 2011 Libya production losses, Goldman gave four scenarios to the disruption to oil.

  • "A very short outage - a week for example - would likely drive long-dated prices higher to reflect a growing risk premium," to roughly a $3-5 dollar increase per barrel.
  • In the second scenario, an outage of two to six weeks would, "see a steepening of the Brent forward curve (2-mo vs. 3-year forward) of $2 to $9/bbl respectively." The bank also said that prices would rise between $5 and $ 14.
  • In the third scenario where there would be more than six weeks of disruption, Brent prices would rise above $75 dollars a barrel, and that strategic petroleum reserves would be implemented.
  • In the worst-case scenario, an outage of more than three months would bring prices above $75 a barrel, and would "trigger both large shale supply and demand responses."

The bank said that the facilities targeted were "critical to Saudi's oil infrastructure," and that the "Abqaiq facility is the world's largest oil processing plant" with the capacity at around 7 million barrels per day.

The strikes have sent shivers through markets due to the lynchpin role Saudi plays in oil markets.

Ordinarily, Saudi Arabia would provide backup oil to stop price surges as it holds the most in reserves - but it looks like even those reserves have been affected.

The events represent "sharp escalation in threats to global oil supply," Goldman said, because of the fact it now shows that there are clear risks to halts in Arabian oil production and that political problems could flare due to Iran being blamed by the US for the attacks.

See More: The attack on Saudi oil supplies threatens what could be the world's biggest IPO. Here's what we know about Saudi Aramco.

Get the latest Goldman Sachs stock price here.

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