Saudi oil attacks response helps calm market
What a difference a week makes. After the drone and missile attacks on Saudi installations in Abqaiq and Khurais, oil shot up $12 per barrel, or 20 percent. This constituted the largest daily increase since Saddam Hussein invaded Kuwait. The attacks knocked 50 percent of Saudi Arabia’s production offline and spooked the markets beyond the oil patch.
A lot depended on how both Saudi Aramco and the Kingdom would react. By Tuesday, prices were down to about $64 per barrel as President Donald Trump indicated a willingness to tap into the US’ strategic reserves if necessary, and as Saudi Aramco said it would be able to return to the pre-strike production level of just under 10 million barrels per day (bpd) by the end of September. The Kingdom’s Energy Minister Prince Abdul Aziz bin Salman indicated that Aramco would achieve 12 million bpd capacity by the end of November.
Aramco came through and proved once more that it is an extraordinarily well-run company with a good communications strategy, informing media and markets of developments as soon as possible. Foreign journalists were given access to the facilities to see and broadcast to the world the damage inflicted by the attacks.
It also showed that the leadership in the Kingdom kept its cool and assessed what needed to be done together with its allies. US Secretary of State Mike Pompeo visited Crown Prince Mohammed bin Salman and the UAE’s Sheikh Mohammed bin Zayed Al-Nahyan. The upshot of his visits was that the US and its allies would beef up maritime security and America would station more troops in the Kingdom. This makes sense in order to guarantee free passage of oil vessels and to beef up the in-country air security. A Saudi military spokesman assured the press that the Kingdom’s defense apparatus had so far averted more than 200 missile strikes. Drones are a different matter and are harder to detect. We should not judge too harshly though. New avenues of attack put every country on the back foot — 9/11 serves as a prime example, as the US was totally unprepared for airplanes being used as weapons. Last December, Gatwick Airport also proved just how tricky drones are, as it had to be shut down for about two days. In the Kingdom, the powers that be have understood the problem and are working on it with the help of their American allies.
Meanwhile, Aramco did its best to supply its customers with the help of inventories it holds across the globe. This is especially important in Asia, where the biggest customers of Saudi crude oil are. Japan, for instance, depends on Saudi Arabia to provide 40 percent of its crude imports. So far, only one Japanese offtaker is reported to have encountered some supply shortage.
There are a few questions remaining. The Gulf Cooperation Council states are an island of stability in a sea of unrest and military conflict, but the attacks have proven that, while Saudi Arabia, Kuwait, Oman, Bahrain and the UAE can ensure in-country stability, they cannot take themselves out of the region.
This brings with it the question of
Aramco’s obvious dependence on the Abqaiq processing facility — an issue that will need to be looked at. It also brings to light the dependence of the world’s oil supply on the Kingdom’s spare capacity, which is estimated to be about 2 million bpd.
All in all, the markets are still relatively oversupplied as a wall of non-OPEC supply, exceeding 2 million bpd, is set to hit international markets by the end of this year and into 2020. At the same time, demand growth has been more sluggish due to the US-China trade war and the overall muted outlook for the global economy.
The oil price has tethered around the $63 to $64 mark. It stood at $63.51 in early Monday trading, down somewhat after it had spiked when a Wall Street Journal article reported concerns as to whether Saudi production could really be fully restored by the end of the month.
We should probably worry less about the short-term picture and more about what an adequate reflection of geopolitical risk should look like. Both Aramco and the Kingdom are working to address both shortand long-term concerns.