Drones Attack Saudi Arabian Oil Production
September 16, 2019
Well there has been a lot of developments over the weekend that have drastically impacted the energy markets and the market opened much higher as overnight trading started Sunday night. On Saturday a coordinated drone strike attached oil processing facilities in Saudi Arabia at Abqaig and nearby Khurais oil field knocking out 5.7 million barrels of daily crude oil production. The attack was carried out by explosive drones and they caused an explosion and an ensuing fire. These attacks have essentially wiped out the world’s spare oil capacity. Saudi Arabia say it has impacted 5.7 million bpd of their production essentially 5% of the world’s production capacity, and roughly 50% Saudi Arabia’s production.
These events have the market concerned not only about oil supplies but also the risk premium as the tensions in the Middle East are now on high alert. The threat of war has already been mentioned by both the US and Iran.
President Trump said on Sunday night that the US was prepared to release oil from the Strategic Reserve if necessary.
The original reports said that the Yemeni Houthi rebels were responsible for the attack, but many have suggested that Iran is the one behind these actions. Iranian Foreign Ministry spokesman Abbas Mousavi dismissed the US allegation it was responsible as “pointless”. A senior Revolutionary Guard commander warned that Islamic Republic was ready for “full-fledged” war.
Saudi Arabia has said that Saudi Aramco has about 30 to 45 days of supply to honor their obligations but not sure beyond that time frame. The damage by the explosion and the fire need to be assessed and the market will continue to get updates and digest this information, but a risk premium has been put into this market and will adjust as more information becomes available. This risk premium could go higher or lower or both as more information and developments take palace.
The market open Sunday night and WTI crude jumped to $63.34 high and Brent crude oil went to a $71.95 high. ULSD traded as high as $2.08 with Friday’s close at $1.8778 a jump of some twenty cents. On Friday RBOB closed at $1.5531 and Sunday at the open if ran up to a high of $1.7533 a move of twenty cents. The market has eased off the highs as I write at 6:50 AM CST ULSD is up $0.12 cents and RBOB up $0.12 as well and WTI crude oil is trading up $4.49.
The initial reaction got priced in Sunday night and now the market will be looking for concrete updates on the impact to production, how long repairs might take, and what the political and geopolitical ramifications are for these events. The headlines will be active, and traders will be on watch. It is a good idea to see how today progresses as more information comes out and reports of the impact get assessed and disseminated. Always a good idea to not overact to these types of situations but be aware of your current needs. You can be sure that a lot will transpire in the coming weeks and months. Historically as the market moves into the fall and harvest demand begins to go down the market trends lower into the end of the year but these recent events have probably changed that outlook as the concerns about all this at a bare minimum have put a floor under the market for now.