Oil jitters
There has been limited market reaction to the drone attacks on Saudi energy assets as investors focus on interest rates and weak growth. But the unprecedented scale of the strikes, and the threat of more, underline the risky ‘new normal’ for the global economy. See our story on
There has been limited market reaction to the drone attacks on Saudi energy assets as investors focus on interest rates and weak growth. But the unprecedented scale of the strikes, and the threat of more, underline the risky ‘new normal’ for the global economy.
On the edge of war and peace” — that is how The New York Times has described US President Donald Trump’s vacillation between hardline and conciliatory decisions on Iran. Both US and Saudi Arabian officials have accused Iran of being behind the attacks on Saudi Arabian oil and gas assets that put roughly 50% of the kingdom’s oil production, or about 5% of global supply, out of action.
On Sept 16, Trump tweeted that the US was “locked and loaded”, in response to the strikes. Not long after that alarming declaration, however, Trump said at the White House that he would “certainly like to avoid” war. “I know they want to make a deal,” he was reported to have said of Iranian officials. Yet, a couple of days later, Trump announces that he has ordered new sanctions to be imposed on Iran, even as he says he is open to meeting President Hassan Rouhani. The Trump administration had, last November, imposed almost-full economic sanctions on Iran that had been lifted or waived under a deal struck in 2015. Rouhani has said Iran would not agree to a meeting until the economic sanctions were lifted.
Meanwhile, US Secretary of State Mike Pompeo’s assertion that the strikes on the oil and gas infrastructure amounted to an “act of war” by Iran is only going to escalate tensions. “We may be entering a new phase of heightened instability and conflict in the Gulf,” says Philip Andrews-Speed, senior principal fellow at the National University of Singapore’s Energy Studies Institute. “If the risks continue or escalate, the impact on the global economy can only be negative, adding additional downward pressure on economic growth to the existing trade war.”
Still, investors’ reaction to these geopolitical events have seemed relatively muted. When markets reopened after the weekend’s strikes, prices of crude oil spiked as much as 20%, as traders scrambled to buy oil contracts amid fears of a prolonged disruption to oil supply. News headlines were also proclaiming that the attacks have effectively “detonated” state-owned oil group Saudi Aramco’s plans for a hundred-billion-dollar IPO.
Crude prices soon moderated, however, falling back to close to the levels they were trading at before the attacks. Even as investigators are examining evidence, including satellite images as well as missile and drone parts recovered from the Abqaiq processing facility and Khurais oil field, Saudi officials said the kingdom’s oil output would be back to full production by month-end. Aramco is going ahead with its IPO plans, which reportedly could happen as early as November, with management back to talking to its bankers on the offering.
Yet, as Yaw Yan Chong, director of Thomson Reuters Oil Research & Forecast in Asia, notes in a report put out by Refinitiv, Aramco has been actively seeking to buy refined products, particularly diesel and jet fuel, from the spot market. He says this is “signalling that all might not be quite as well as the Saudi government would have the market believe”.
He adds: “Price levels for potential replacement crude grades similar to the ones affected by the drone attacks — the Arab Light and Arab Extra Light grades — have jumped in their latest spot tenders for November-lifting cargoes, signalling that the market remains cautious.”
Indeed, the market does seem to be taking extra risk into account. Even after coming off the temporary peak, benchmark crude prices are still US$4 to US$5 per barrel higher than pre-attack levels. “Upward pressure on prices will continue, owing to the perceived risk of continuing or escalating conflict in the Middle East,” says NUS’s Andrews-Speed. “We are already seeing Chinese companies (for example, Unipec) buying more oil from the US.”
How should investors react? What are the wider implications of the still-unfolding events?
Cracking supplies
The 17 points of impact at Abqaiq, Aramco’s largest oil processing facility, showed up on satellite images released by the US government as large holes on the side of storage tanks and smoking chimneys.
As Yaw’s report notes, the strikes on Abqaiq — the world’s largest crude-processing plant, with a capacity of seven million barrels per day — will affect the global refined products market, mainly middle distillates, and petrochemicals market. It will also severely affect Saudi Arabia’s own petrochemicals production, as Abqaiq also supplies gas to the kingdom’s own crackers, and its refineries run on lower levels of crude feedstock.
Saudi Arabia is the largest supplier of crude to Asia, accounting for about a quarter of supplies so far this year. According to Refinitiv, the kingdom is the largest supplier to China, having expanded its market share on the mainland to account for about 18% of imports, overtaking Russia, or about 6.5 million tonnes a month. The kingdom is also the largest supplier to Japan and South Korea, with a 40% and 36% market share respectively. Its main customers include China’s Sinopec, as well as India’s Reliance Industries, Taiwan’s For
mosa Petrochemical Corp and Japanese refiners.
Yaw expects that the Saudis will draw