The Energy Report 9/16/19

A Historic Outage

The weekend attack on the Saudi Arabian oil facilities over the weekend is historic and changes the complexion of risk going forward. Oil prices hit the 7% circuit break on the night session paused and went higher as the market tries to adjust to the biggest supply outage in history. Bloomberg reported that the sudden loss of 5.7m b/d of oil production is the single largest outage the market has ever suffered larger in volume than the loss of Iraqi and Kuwaiti output in the 1990 Gulf War, and the loss of Iranian oil in the 1979 Islamic Revolution. Still, with the size of the global oil market being much larger at 100 million barrels a day of consumption percentage wise it’s a little less ominous. Still Brent crude posting its biggest intra-day percentage gain since the Gulf War in 1991 according to Reuters as Saudi sources are saying that the return to full oil capacity could take weeks, not days. Still the Saudis are assuring us that they can export oil that they have in storage and can ramp up some production at other facilities.

Yet the risk to oil is far from over. President Trump on one hand wanted to assure the oil markets but also raised to risk of a retaliatory attack on someone in a series of tweets. The first tweet was “Saudi Arabia oil supply was attacked. There is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom as to who they believe was the cause of this attack, and under what terms we would proceed!” Another tweet was “Based on the attack on Saudi Arabia, which may have an impact on oil prices, I have authorize the release of oil from the Strategic Petroleum Reserve, if needed, in a to-be-determined amount….sufficient to keep the markets well-supplied. I have also informed all appropriate agencies to expedite approvals of the oil pipelines currently in the permitting process in Texas and various other States. Iran for their part says that “These allegations are condemned as unacceptable and entirely baseless,” Foreign Ministry spokesman Abbas Mousavi said in remarks carried by state TV.

John Kemp at Reuters writes about the vulnerability of Saudi Arabia’s Abqaiq processing complex that was attacked by militants, foreign special forces or missile strikes. He writes that oil fields 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 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. 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.

What is crazier is that oil would have railed anyway without the attack. No, not by a record amount, but higher none the less. The U.S. oil rig count is falling. Rig Zone reported that the U.S. shed 12 rigs, according to weekly data from Baker Hughes. The U.S. shed five oil rigs and seven gas rigs this week, bringing the nation’s total number of active rigs to 886. This is 169 fewer than the count of 1,055 one year ago. Texas dropped the most rigs, at eight. The following states also lost rigs this week. Pennsylvania added two rigs, while North Dakota and Oklahoma tacked on one rig apiece. The Permian led all declines this week among the major basins, shedding eight rigs. This brings the Permian’s rig count to 419, which accounts for nearly half of the nation’s active rigs. The Cana Woodford lost three rigs, the Marcellus lost two rigs and the following basins lost one rig each: DJ-Niobrara, Eagle Ford and Utica. The Barnett added three rigs, while the Haynesville and Williston added one rig.

We also have a lot of tropical storm activity. Category 1 Hurricane Humberto continued to grow in the Atlantic with its path taking it away from Florida on Monday morning, according to the National Hurricane Center’s 5 a.m. update. Humberto grew overnight, now with maximum sustained winds of 85 mph, and is moving northeast at 5 mph into the Atlantic, with only Bermuda in its cone of uncertainty, forecasters said. Fox News Says that Weather forecasters predicted that the storm would gain in strength but the storm is not expected to make landfall. The storm is expected to turn east and head out to sea. Its swells could still affect the coasts of Florida, Georgia, South Carolina and North Carolina in the coming days.

Oil is in a breakout mode so we believe there will be breaks to be bought. If you have not filled up your gas tank, you may want to. The attack may ad 10 to 15 cents a gallon.

Trade strategy may be key to ride out the crazy moves that will come with the headlines so keep in touch with me and the Fox Business Network. Checkout this Interview on Mornings with Maria

Phil Flynn
The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to FOX Business Network

Posted in

Tagged keywords...