Drone Strikes Disrupt Half of Saudi Arabia’s Oil Flow, but Duration Unclear and Global Stocks are Ample
This is a flash report and advisory commentary to share our thoughts on today’s attacks on Saudi Arabia’s oil infrastructure. This note draws upon the collective wisdom of friends, colleagues, and clients across TPH Nation.
Information about the incident remains fluid. Here are the facts that we can confirm:
Early on Saturday morning, coordinated drones attacked Saudi Arabia’s oil infrastructure.
There were at least two targets: Abqaiq, the world’s largest oil-producing facility, and the Khurais oilfield, one of the world’s most productive with capacity of about 1.5 million b/d.
The Saudi government has publicly confirmed the attacks forced half of the Kingdom’s crude processing offline, through an unknown combination of outright damage and a precautionary shut-in as Aramco assesses the damage. Saudi Arabia produced 9.85 million b/d in August, according to OPEC. The disrupted output amounts to about five million barrels per day, or about 5% of global liquids production.
Prior to the attacks, TPH Commodities had expected global oil demand to average 100.48 million b/d in 2019 and 101.88 million b/d in 2020.
Duration for the shut-in is unknown. Scale of actual damage is unknown.
A spokesman for Yemen’s Houthi rebels made a televised announcement this afternoon claiming responsibility for the attack and promising more will come if Saudi Arabia does not cease military operations in Yemen.
Iran has provided military and logistical support to the Houthis in their fight against the Saudis. In a tweet late this afternoon (Saturday), US Secretary of State Mike Pompeo wrote “Amid all the calls for de-escalation, Iran has now launched an unprecedented attack on the world’s energy supply. There is no evidence the attacks came from Yemen.”
Given the opacity of information, we believe it would be unwise to jump to premature conclusions, especially with respect to crude prices. Rather we think it is best to “roadmap” how these risks may play out through an if/then lens and calibrate analysis and strategy as more facts become known. Here is how we are thinking about implications:
Be wary of any oil price surge. When oil futures markets open tomorrow, there may be a reflexive surge in price. This will first be a symptom of short-covering more so than traders jumping in to get long. On second-round effects, it is possible that short-covering breeds upside momentum, as systematic and discretionary trading systems explore the upside, especially if liquidity is light on a Sunday night. It would not be a surprise to see prompt crude rise by anywhere from $0/b to $15/b. But it is critical to be prepared for any price spike to be far smaller than one might expect due to the severity of the incident. Moreover, history and economic logic show there is a significant risk that spot prices soon fall as supply countermeasures are put into place, including draws from commercial and strategic stocks and calls on idled production capacity. We have seen a sharp increase in inbound inquiries about hedging strategies in response to the attack, especially among producers. If prices rise, their incentive is to sell into transient prompt strength. If prices fall, their incentive is to sell (hedge) before prices get worse.
Be prepared for swifter-than-expected resumption of “most” operations. Our technical experts have reached out to their oilfield service contacts in the Middle East. The soundings suggest the damage is more downstream focused. If this assessment is correct, the upstream losses may be smaller than feared. The simple fact is the size of the durable outage is an unknowable number at this time.
OPEC has about 3 million b/d in spare capacity. If there is durable damage to the production stream, the rest of OPEC has spare capacity to fill in gaps.
Global commercial stocks are ample. Return of “most” output, whether upstream or downstream, does not mean “all”. Even if OPEC spare capacity is brought online, it is highly likely that global commercial stocks will be called upon to fill any shorter-term gaps in production. Data from our friends at Ursa Space Systems counted 2.083 billion barrels of crude oil in storage around the world two days ago. These are satellite-based measurements of individual tanks. Ursa counts 700 million barrels of crude in OECD countries, and 1.38 billion barrels of crude in Non-OECD countries. Those figures include both commercial and reserve inventories. < Keep in mind that this is an industry of very large numbers. The world consumes over 3 billion barrels of oil based products per month. - Dan.
Global emergency stockpiles (strategic reserves) are ample
United States: The US SPR presently holds 644.8 million barrels (90% of capacity of 713.5 mb), of which 250.3 mb are sweet and 394.5 mb are sour. The reserves are held deep underground at four salt domes on the US Gulf Coast in Texas and Louisiana. President Trump has unilateral authority to order a release on his sole command. The maximum disbursal rate is 4.4 million b/d for up to 90 days, then slower after that. At 1 million b/d, disbursals can continue for 18 months. It can take up to two weeks to reach max flow. But recall that there are already Saudi barrels “on the water”. It will take 7 to 40 days for today’s disruption to be really felt on supply chains. There is time to coordinate a strategic response among the consuming countries.
China: Our friends at Ursa count 712 million barrels of crude in China, of which about 163 or 164 million are allocated as emergency supplies. China can draw on these reserves for months to offset lost imports from Saudi Arabia.
Others: there are also substantial emergency reserves in Japan, India, and other consuming countries.
Potential US military reprisal against Iran. If Iran is proved to have been directly involved in this attack, there will be a higher risk of a military reprisal from US. Indeed, if Iran is directly involved, it raises the question of whether the departure of John Bolton was a catalyst for timing. If that’s true, and Iran did just punch Saudi Arabia directly, it may motivate Trump to hit Iran to prove he is “as tough as Bolton”. If that happens, then uncertainty and risk will increase and oil price volatility will likely revisit historical highs (60% annualized).
Whatever happens with crude and other energy prices, this incident punctures the image of Saudi security as impenetrable. As such, one surprising outcome of the incident may be redirection of investors’ attention back to the deeply undervalued hydrocarbon resources in North America. For more on that dimension, we direct you to consult with our securities team.
Saudi Arabia - Update from TPH
Saudi Arabia - Update from TPH
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Saudi Arabia - Update from TPH
Bloomberg: Pompeo Blames Iran For Drone Attack on Saudi Oil Industry
Sunday, 15 September 2019 08:26 AM
Secretary of State Michael Pompeo blamed Iran for a series of brazen attacks on a massive Saudi Aramco oil facility, saying there was no evidence the drones originated in Yemen as Tehran-backed rebels there claimed.
Iran denied responsibility for the raids Saturday, which forced Saudi Arabia to slash its daily oil output in half.
Pompeo tweeted after the White House confirmed that President Donald Trump offered support for Saudi Arabia’s self-defense in a call on Saturday with Saudi Crown Prince Mohammed Bin Salman.
Iran launched an “unprecedented attack on the world’s energy supply,” Pompeo said on Twitter after at least one Republican lawmaker urged the U.S. to respond in kind with a strike on Iranian oil facilities. He gave no evidence to back up that allegation.
The Wall Street Journal reported that Saudi and U.S. officials are investigating the possibility that cruise missiles were launched from Iraq, which is much closer than Yemen, and is home to a host of Iran-backed Shiite missiles.
Pompeo said the U.S. will work with allies to ensure the energy market remains well supplied, echoing comments from the White House. He also called on all nations to “publicly and unequivocally condemn Iran’s attacks.”
Saudi Arabia, which is locked in multiple proxy wars with Iran in the Middle East trying to contain its widening influence, hasn’t blamed anyone for the assault on the oil facility. On Sunday, it was racing to restore oil production after state energy producer Saudi Aramco lost about 5.7 million barrels per day of output in the raids on the world’s biggest crude-processing facility and the kingdom’s second-biggest oil field.
The attack intensified the volatility in the Persian Gulf region, which has been destabilized by a showdown between the U.S. and Iran over the 2015 nuclear deal. Frictions have mounted in the Gulf ever since Trump quit the deal last year and began reimposing harsh sanctions on Iran to try to force it to renegotiate a deal that would more broadly limit its nuclear and military ambitions.
Iran has responded by rolling back some of its obligations under the accord, as the agreement allows parties to do when others pull away from their commitments. It’s also been accused of carrying out a number of attacks on oil tankers in the Gulf region, charges it has denied.
Iranian Foreign Ministry spokesman Abbas Mousavi rejected the latest U.S. allegations, saying such “blind and fruitless accusations and statements are unfathomable and meaningless.” Foreign Minister Mohammad Javad Zarif tweeted, “Having failed at ‘max pressure,’ @SecPompeo’s turning to ‘max deceit.’”
Iranian-backed Houthi rebels in Yemen claimed responsibility for the strikes. A Saudi-led coalition backed by the U.S. has been fighting for more than four years to try to vanquish the Houthis and restore Yemen’s President Abdrabbuh Mansour Hadi to power. But the Houthis have proven more tenacious than the Saudis expected, withstanding four years of withering air attacks and fighting off better-armed forces with a disciplined insurgency.
They’ve stepped up their drone and missile attacks on enemy forces and Saudi territory, and as the war has dragged on, thousands of civilians have died, millions have gone hungry, and al-Qaeda and Islamic State have mounted a resurgence.
The U.S. “strongly condemns today’s attack on critical energy infrastructure,” White House spokesman Judd Deere said in an emailed statement that was also posted on Twitter. The U.S. government “is monitoring the situation and remains committed to ensuring global oil markets are stable.”
France, which has been working with Iran to try to salvage its nuclear deal with world powers after the U.S. pulled out last year, condemned the attacks and expressed “total solidarity” with the kingdom.
“Such actions can’t but aggravate the tensions and the risk of conflict in the region,” the French Foreign Ministry said. “It’s imperative they stop,” it added, without assigning blamed.
Republican Senator Lindsey Graham, a confidant of Trump, earlier urged a decisive U.S. response against Iranian targets.
“It is now time for the U.S. to put on the table an attack on Iranian oil refineries if they continue their provocations or increase nuclear enrichment,” Graham of South Carolina said on Twitter. “Iran will not stop their misbehavior until the consequences become more real, like attacking their refineries.”
Sunday, 15 September 2019 08:26 AM
Secretary of State Michael Pompeo blamed Iran for a series of brazen attacks on a massive Saudi Aramco oil facility, saying there was no evidence the drones originated in Yemen as Tehran-backed rebels there claimed.
Iran denied responsibility for the raids Saturday, which forced Saudi Arabia to slash its daily oil output in half.
Pompeo tweeted after the White House confirmed that President Donald Trump offered support for Saudi Arabia’s self-defense in a call on Saturday with Saudi Crown Prince Mohammed Bin Salman.
Iran launched an “unprecedented attack on the world’s energy supply,” Pompeo said on Twitter after at least one Republican lawmaker urged the U.S. to respond in kind with a strike on Iranian oil facilities. He gave no evidence to back up that allegation.
The Wall Street Journal reported that Saudi and U.S. officials are investigating the possibility that cruise missiles were launched from Iraq, which is much closer than Yemen, and is home to a host of Iran-backed Shiite missiles.
Pompeo said the U.S. will work with allies to ensure the energy market remains well supplied, echoing comments from the White House. He also called on all nations to “publicly and unequivocally condemn Iran’s attacks.”
Saudi Arabia, which is locked in multiple proxy wars with Iran in the Middle East trying to contain its widening influence, hasn’t blamed anyone for the assault on the oil facility. On Sunday, it was racing to restore oil production after state energy producer Saudi Aramco lost about 5.7 million barrels per day of output in the raids on the world’s biggest crude-processing facility and the kingdom’s second-biggest oil field.
The attack intensified the volatility in the Persian Gulf region, which has been destabilized by a showdown between the U.S. and Iran over the 2015 nuclear deal. Frictions have mounted in the Gulf ever since Trump quit the deal last year and began reimposing harsh sanctions on Iran to try to force it to renegotiate a deal that would more broadly limit its nuclear and military ambitions.
Iran has responded by rolling back some of its obligations under the accord, as the agreement allows parties to do when others pull away from their commitments. It’s also been accused of carrying out a number of attacks on oil tankers in the Gulf region, charges it has denied.
Iranian Foreign Ministry spokesman Abbas Mousavi rejected the latest U.S. allegations, saying such “blind and fruitless accusations and statements are unfathomable and meaningless.” Foreign Minister Mohammad Javad Zarif tweeted, “Having failed at ‘max pressure,’ @SecPompeo’s turning to ‘max deceit.’”
Iranian-backed Houthi rebels in Yemen claimed responsibility for the strikes. A Saudi-led coalition backed by the U.S. has been fighting for more than four years to try to vanquish the Houthis and restore Yemen’s President Abdrabbuh Mansour Hadi to power. But the Houthis have proven more tenacious than the Saudis expected, withstanding four years of withering air attacks and fighting off better-armed forces with a disciplined insurgency.
They’ve stepped up their drone and missile attacks on enemy forces and Saudi territory, and as the war has dragged on, thousands of civilians have died, millions have gone hungry, and al-Qaeda and Islamic State have mounted a resurgence.
The U.S. “strongly condemns today’s attack on critical energy infrastructure,” White House spokesman Judd Deere said in an emailed statement that was also posted on Twitter. The U.S. government “is monitoring the situation and remains committed to ensuring global oil markets are stable.”
France, which has been working with Iran to try to salvage its nuclear deal with world powers after the U.S. pulled out last year, condemned the attacks and expressed “total solidarity” with the kingdom.
“Such actions can’t but aggravate the tensions and the risk of conflict in the region,” the French Foreign Ministry said. “It’s imperative they stop,” it added, without assigning blamed.
Republican Senator Lindsey Graham, a confidant of Trump, earlier urged a decisive U.S. response against Iranian targets.
“It is now time for the U.S. to put on the table an attack on Iranian oil refineries if they continue their provocations or increase nuclear enrichment,” Graham of South Carolina said on Twitter. “Iran will not stop their misbehavior until the consequences become more real, like attacking their refineries.”
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group