Oil prices rise as Saudi supply risks come into focus

By Collin Eaton

HOUSTON (Reuters) - Oil prices rose on Tuesday on fears of longer-than-expected supply shortfalls following Saturday's attacks on a key Saudi Arabian oil processing facility and of escalating tensions in the Middle East.

Brent crude futures gained $1.01 to $64.61 a barrel by 11:05 a.m. CDT (1605 GMT), while U.S. West Texas Intermediate crude was up 45 cents at $58.56 a barrel.

Drone attacks knocked out around half of Saudi Arabia's crude production and severely limited the country's spare capacity, a cushion for oil markets in any unplanned outage. Tensions have escalated as the United States and Saudi Arabia blamed the attacks on Iran.

"The Saudi oil industry could be threatened again and we could see more supply disruption from the Persian Gulf," said Gene McGillian, vice president of market research at Tradition Energy in Stamford, Connecticut.

"What's hanging over the market's head is the response that may be coming. How will the U.S. and Saudi Arabia respond to this?" he said.

Saudi Arabia, the world's leading crude exporter, has said the crippling attack on its oil sites was "unquestionably sponsored" by regional rival Iran.

U.S. President Donald Trump said there were many options short of war and added he had ordered the U.S. Treasury to "substantially increase sanctions" on Tehran. Iran has denied involvement in the strikes and warned Trump against being dragged into war.

U.S. Secretary of State Mike Pompeo has described the weekend strike as an act of war. He said Washington has been discussing possible retaliation with Saudi Arabia and other Gulf allies but wanted a peaceful resolution.

"We are still striving to build out a coalition in an act of diplomacy while the foreign minister of Iran is threatening all out war and to fight to the last American," Pompeo told reporters. "We're here to build up a coalition aimed at achieving peace."

Saudi Arabia has said it would restore lost production by the end of this month, and bring its output capacity back to 12 million barrels per day by the end of November.

The Wall Street Journal reported Saudi Arabia had asked Iraq's State Organization for the Marketing of Oil (SOMO) for as much as 20 million barrels of crude, but an Iraqi state news agency said SOMO denied Saudi Arabia had requested crude supplies for its refineries.

The oil market "is rapidly calling into question whether Saudi Arabia can come through this as cleanly as they claim," said John Kilduff, a partner at Again Capital LLC in New York.

Separately, weekly data from the Energy Information Administration provided a mixed snapshot of oil inventories in the United States, the world's largest oil producer.

The data showed a rise of 1.1 million barrels in U.S. stockpiles of crude last week, not the draw of 2.5 million barrels analysts had expected. However, stocks at Cushing, Oklahoma, the delivery point for benchmark futures, fell to their lowest since October 2018.

(Additional reporting by Ahmad Ghaddar in London, Florence Tan in Singapore; editing by David Gregorio and Emelia Sithole-Matarise)

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