The details of the initial attack on Saudi Arabia infrastructure and the plan to bring oil production back online are much clearer a week after the incident. Saudi officials announced that a combination of roughly 25 drones and cruise missiles were used across two oil facilities. Nearly half of the original 5.7 million barrels per day (mmbd) taken offline following the attack was reportedly restored within 48 hours. The remaining capacity will come online by the end of September after repairs are completed.
Prices have generally followed the headlines, with the largest price spikes occurring in the first open day of trading on Monday, September 16. In the remaining days of the week, positive news from returning production and softening rhetoric from the U.S. has eased much of the original concerns. Prices steadied 8 to 11¢ per gallon below the initial 20¢ per gallon spike for NYMEX heating oil (U.S. national benchmark for the diesel commodity). To end the week, spot prices remain just over 10¢ per gallon higher than pre-attack levels.
The attack is still believed to have originated from Iran, though the Iranian government denies this claim. Crude oil and refined product price premiums remain due in large part to concerns for retaliatory actions against Iran from Saudi Arabia, the United States, or other allies. While President Trump has stated he does not want war with Iran, he has pledge U.S. support for the stability and self-defense of Saudi Arabia. The attacks are the latest test in U.S.-Iran relations, which place significant geopolitical pressure on the outlook for global crude oil and refined products prices.
Energy Price Impacts Post Saudi Arabian Attacks
One day after commodities and equities markets opened following the worst sudden oil supply loss in history—removing approximately 5.7 million barrels per day of production, or nearly 6 percent of global oil supply—rhetoric has shifted and energy prices have begun to stabilize.
The WTI and Brent crude oil benchmarks closed on Monday, September 16 at $62.90 and $69.02 per barrel, respectively. Both marked day-over-day increases greater than $8.00 per barrel. Diesel spot market price increases ranged from $0.201 to $0.274 per gallon, causing a $0.176 increase in today’s wholesale diesel market. The DOE retail diesel index only increased $0.016 per gallon, highlighting the inherent distortion in index-based pricing compared to actual market dynamics.
As of Tuesday morning, September 17, energy prices had given back roughly half of Monday’s price gains. This was influenced by softened rhetoric from the U.S. and reports of Saudi production coming back online sooner than expected.
Bringing Saudi Arabia’s Production Back Online
A timeline for the return of Saudi Arabia’s production capacity is still unclear, though it is believed at least a portion of the nation’s output could return in the coming days. Other reports indicate upwards of 70 percent of the country’s production is close to resumption. The time horizon of Saudi Arabian output coming back online will likely influence crude oil and diesel prices in the near-term, as will changing sentiment from industry leaders regarding this event.
These attacks exposed the vulnerability of the oil market’s supply and its reliance on Saudi Arabia’s energy assets. Not only do recent developments in the Persian Gulf put pressure on the near-term oil fundamentals, but also increase the likelihood of heightened tension in the Middle East and its energy landscape altogether.
Crude oil and refined products are highly volatile, and at Breakthrough we monitor all the factors that influence the costs associated with these necessary commodities so that shippers and carriers can remain informed.
9.16.19 Original Post
Initial Market Shocks from Saudi Arabian Oil Outage
A weekend attack on Saudi Arabia’s major oil facilities impacted over 5 million barrels per day – roughly half of the nation’s production. This represents nearly 6 percent of global oil production, sending oil and refined product prices soaring. The latest reports believe that ten or more drones carried out the attack on two major sites. Saudi officials are hopeful that some of the outages can be brought back online in the near term but are less hopeful for a rapid full-scale recovery.
The United States was quick to place responsibility for the attack on Iran, though the Iranian government has denied its direct involvement. To complicate matters, Houthi rebels – a military group with Iranian ties – claimed responsibility for the attacks. This event is the latest, and arguably the most serious, escalation of tensions in the Middle East.
What is the Impact of Saudi Crude Oil Outage on Prices?
Markets opened on Monday with prices up over $6 per barrel and $0.16 per gallon for WTI crude oil and NYMEX heating oil, respectively. If these gains hold, it will be the largest single-day price gain for WTI in over seven years. These upstream price movements usually take one day to move into the downstream wholesale cost of fuel at the pump. As such, Tuesday’s wholesale prices will most likely increase by well over $0.10 per gallon—under the $0.50 to $0.60 impacts cited by some coverage of the event.
These price fluctuations will automatically be adjusted in fuel reimbursements for Fuel Recovery clients. Shippers using Fuel Recovery should not entertain any special surcharges to compensate for the move.
President Trump was quick to comment on the attacks, stating that the U.S. oil market is well supplied and that he will consider releasing oil from the nation’s Strategic Petroleum Reserve (SPR) if necessary. This may help alleviate some of the price pressures, but the global nature of crude oil and refined products commodities will still bring price premiums to nearly all markets across the world.
What are the Longer-Term Implications of Decreased Supply?
The global oil supply-demand balance is most often within 1 to 2 million barrels per day. An extended Saudi outage would leave the world market under-supplied, which would have a more significant upward price risk. The imbalance could be offset in the longer term by increased U.S. production. There is also the potential for increased production from OPEC+ nations, although early indications are that those countries will not immediately increase oil output.
The current price implications are notable, although, bigger implications exist in Iranian relations with the U.S. and our allies. Tensions have been on the rise for much of 2019, especially following the removal of sanction waivers in May, which effectively ended Iran’s revenue stream of oil exports to much of the world. In the months that have followed the waiver removals, multiple attacks on pipeline infrastructure and crude tanker attacks in the world’s top marine chokepoint – the Strait of Hormuz – have raised tensions and energy prices.
The latest attack led the U.S. and other Saudi allies to pledge their support to keep stability in the region, which could manifest into military intervention. Any confrontation with Iran would also lead to confrontation with the various military factions Iran supports throughout the Middle East. This could have significant impacts on the global crude oil price outlook.
The Advisor team will continue coverage on this event during the monthly Advisor Webcast (Wednesday, September 18).