Energy Prospectus

In pre-market trading, WTI spiked to $60.30 on a lot of short covering. Details from Saudi Arabia on the extent of the damage will take awhile. Based on what I've seen so far, it sounds like approximately 3 million barrels per day will need to stay offline. How long is yet to be determined. IMO there needs to be at least a $5/bbl geopolitical premium added to the price. Companies that are unhedged (CLR, EOG and VNOM) should get the most attention. - Dan

Note from John White at Roth Capital at 7AM CT

Due to the disruption in oil production in Saudi Arabia, we could see crude oil prices increase anywhere from $5/bbl to $10/bbl on Monday morning. The first impetus to the increase in price will be short covering and subsequently electronic and discretionary trading as parties explore the potential upside. We do not, however, believe this increase will be sustained into the full week. In our view, crude oil prices will move lower later, perhaps later Monday or early Tuesday, as short covering is completed, the market receives more positive updates on the restoration of the Saudi facilities and the market becomes comfortable with the large amount of crude oil in conventional inventories and strategic petroleum inventories.

As reported by the Wall Street Journal on 9/15/2019, Saudi Arabia’s national oil company expects to restore roughly a third of crude output disrupted due to a weekend attack by day’s end on Monday, Saudi officials said, a step back from earlier hopes that it could quickly resume full production by the start of the week. The strikes on Saudi facilities Saturday knocked out 5.7 million b/d of production, and the officials said they still believe they can fully replace it in coming days. That would require tapping oil inventories and using other facilities to process crude.

Oil in Storage

On 9/14/2019, the New York Times quoted the Rapidan Energy Group, a Washington-based market research firm, that estimated the Saudis have 188 million barrels of oil on hand, or enough to cover a disruption of five million barrels per day for 37 days.



As set forth in the IEA’s Oil Market Report for September 2019 OECD commercial crude oil stocks increased by 1.5 million barrels in July to 2,931 million barrels. Stocks in terms of days of forward demand rose by 0.1 days to 60.5 days.

According to the EIA, the U.S. Strategic Petroleum Reserve (SPR) currently holds nearly 645 million barrels of oil. Based on its sustained drawdown rate, the SPR can draw down crude oil at an initial sustainable rate of 4.4 million for a period of 90 days. After this period, the drawdown rate gradually decreases as site inventories are depleted. On 9/15/2019 Reuters reported U.S. President Donald Trump authorized the release of oil from the SPR if needed in a quantity to be determined.

As of 7:39 PM ET, WTI crude oil was up 10.9% at $60.83/bbl.

Possible Geopolitical Crude Oil Price Premium

In the intermediate term, the attacks this weekend on Saudi oil infrastructure could result in a “geopolitical premium” being built into crude oil prices as the market adjusts to the possibility of additional attacks. The amount of premium is difficult to estimate and will depend on possible Saudi military retaliation and subsequent outcome. At this point we would estimate this premium, if it materializes, in the range of $2/bbl to $5/bbl for WTI crude oil.

Among our large cap names likely to benefit on Monday, our top pick is FANG while our small cap favorites are EPM, ESTE and LONE. Relative value metrics on our U.S. E&P coverage are attached.

Market Watch: OPEC Chief Barkindo says ‘no need to panic’ after biggest-ever disruption to global production
Published: Sept 16, 2019 8:38 a.m. ET

That is OPEC Secretary-General Mohammed Barkindo official comment in a phone interview on Bloomberg News on Monday, in the wake of the attacks on major oil processing facilities that has roiled the global crude market.

“What we see in markets are the initial reaction from the community but going forward I think the updates from Saudi Arabia,” will calm the market, Barkindo told Bloomberg.

Barkindo also said it was “premature to contemplate what will be done” in terms of increasing capacity from members of OPEC+, a group of major oil producers that also includes Russia.

The oil cartel’s chief told Bloomberg that OPEC has learned an important lesson from the attacks on Saturday that knocked offline some 5.7 million barrels a day of oil, representing about 5% of the world’s production. The oil output disruption is being described by energy experts as the largest-ever.

However, the Nigerian head of the Organization of the Petroleum Exporting Countries appeared to urge calm as the markets wrestled with the severity and potential length of disruption of the Saudi Aramco Abqaiq plant and its Khurais oil field. The Wall Street Journal, citing Saudi officials, have said a third of output would be restored on Monday, but a return to full production may take weeks, experts have said.

OPEC and Russia are holding off on pumping more oil to fill gaps in global supplies, the Journal also reported, citing officials. Saudi Arabia held calls with cartel members and other oil-producing allies over the weekend and told producers they wouldn’t need to respond with a boost to output, the report said.

COLUMN-Attack on Saudi Abqaiq finds the oil market's Achilles heel: Kemp - Reuters News
16-Sep-2019 11:58:11
John Kemp is a Reuters market analyst. The views expressed are his own
By John Kemp
LONDON, Sept 16 (Reuters) - Oil security experts have worried for decades about the vulnerability of Saudi Arabia's Abqaiq processing complex to an attack by militants, foreign special forces or missile strikes.

Oilfields make a difficult target because of the dispersed nature of the wells and associated infrastructure, but processing facilities and export terminals are concentrated and therefore more vulnerable.

Abqaiq processes about half of all crude produced in the kingdom, including output from the supergiant fields of Ghawar (3.8 million barrels per day) and Shaybah (1.0 million bpd).

Abqaiq is a single point of failure that could remove millions of barrels per day from the global oil market for an extended period if damaged badly enough. It has long been identified as the top security risk worldwide.

For that reason, Abqaiq has been one of the most heavily protected places on the planet. Saudi Arabia has armed guards to protect the perimeter, and security forces actively target threats from foreign militants and domestic dissidents.

In addition, the United States maintains a large Central Intelligence Agency station in the country and has military personnel stationed in the Eastern Province to help protect against external threats.

Abqaiq has always been a much greater source of risk for the oil market than the Strait of Hormuz. But until the weekend attack, it was assumed to be a high-consequence, low-probability danger so was largely discounted.

Saudi security forces foiled an apparent suicide car bomb attack on the facility in 2006, when guards opened fire on at least two cars carrying explosives as they tried to ram the gates, according to contemporary reports.

As a result, security experts concluded Abqaiq was relatively safe in most circumstances short of an open military conflict with Iran; Saturday's attack has shown that assessment was wrong.

The Abqaiq attack will therefore force a major re-evaluation of security risks in the oil market, where it has highlighted global vulnerability to a single point of failure.

Following the simultaneous attacks on Abqaiq and the Khurais oilfield, Saudi Arabia has suspended production amounting to 5.7 million barrels per day, or more than 5% of global supply.

In the short term, the critical questions are how to repair Abqaiq and protect it from further attacks. In the long term, the issue is how to reduce reliance on the site by re-routing oil flows and creating more redundancy in the oil export system.

Abqaiq will also force a reassessment of the kingdom’s security strategy, which has centred on reinforcing its alliance with the United States; encouraging maximum pressure on Iran; cultivating closer links with Israel; and a forward posture in Syria and Yemen and to a lesser extent in Lebanon and Iraq.

The strategy assumed armed confrontation with Iran could be kept outside the kingdom’s borders while oil output and the major population centres could be kept safe, which is no longer the case.

RETALIATION

U.S. Secretary of State Mike Pompeo has publicly blamed Iran for the attacks on Abqaiq and Khurais in messages posted on Twitter.

The White House, the Saudi government and U.S. allies in Europe and the Middle East have so far been more cautious and not identified the group or country they believe is responsible.

U.S. President Donald Trump has nonetheless warned that U.S. armed forces are "locked and loaded depending on verification".

While Iran has denied blame for the attacks, its Yemeni allies have promised more strikes to come. Houthi military spokesman Yahya Sarea said the group carried out Saturday's pre-dawn attack with drones, including some powered by jet engines. < IMO what difference does it make if the drones came directly from Iran or Yemen? Everyone knows that the Houthi are backed by Iran and that they could never pull off an attack like this without Iran's help. - Dan.

In the event of retaliation, the problem would be how to control the resulting escalation cycle, the same issue that arose in relation to attacks on shipping in the Strait of Hormuz earlier this year.

The attack on Abqaiq is too significant for the United States to ignore. But once started, escalation cycles can be difficult to control (“Strait of Hormuz and the risk of uncontrolled escalation”, Reuters, June 13).

In the face of military reprisals, Iran might feel compelled to respond. Oil facilities and infrastructure in eastern Saudi Arabia as well as shipping in the Gulf would be prime targets that would be difficult to defend.

Under attack from U.S. airpower, Iran’s military commanders might feel compelled to make a rapid decision to “use it or lose it”, hitting back hard before their assets and capabilities are destroyed by air strikes.

In the event of open conflict between a U.S.-Saudi alliance and Iran, oil production and exports could sustain even more serious damage.

One option would see the United States try to limit the conflict by attacking non-core Iran-aligned targets in Yemen and Iraq.

Attacking Iran itself would make escalation harder to control, though targets could be selected for their symbolic rather than practical value and carefully circumscribed.

The aim would be to create a firebreak in the escalation cycle and try to convince Iran to absorb the attack and not respond or at least limit its response.

Careful target selection could be used to signal the limited nature of the U.S. response and try to avoid further escalation.

But it would require exquisite strategic finesse by the White House and the U.S. regional combatant command as well as urgent messaging to Iran’s government and local commanders.

More generally, the United States and Iran appear locked into a cycle of escalating pressure on each other, which neither side appears able to control.

Escalation is pushing both sides towards a major armed confrontation neither claims to want but which would drag in regional and global allies.

Neither side appears to have identified good exit options or a political-diplomatic alternative at this stage, though both have mentioned an interest in negotiations.

But the attacks on Abqaiq and Khurais underscore the fact regional security is deteriorating and the confrontation between the United States, Saudi Arabia and Iran is becoming much more unpredictable and dangerous.

It would seem that the Iranians hit KSA where it counts in the wake of the Saudi Aramco IPO. My guess is there is little risk of US military retaliation as Trump will do anything to keep oil prices low and will not tolerate escalation. I think Trump’s right price is in the 50’s. Reports appear that though Saudi has lots of armaments they lack the skills and forces in deploying them. Now Israel may be another story.

Lots of reports on Fox about US energy independence, ease of us increasing production, and the world being well supplied. Expect to hear continued reports that downplay the damage to keep the oil markets calm.

MY TAKE is that there is more upside in the equities of the upstream companies that heavily are heavily weighted to oil. Companies that sell oil into the LLS market will get the most out of the spike in Brent.
LONE, SM, ESTE, MTDR, CRZO, EOG have lots of Eagle Ford production that sells at LLS pricing. SNDE is a recent addition to my Watch List that is getting a lot of love today. DNR and TALO sell into the Gulf Coast market.