Traders have scrambled to calculate what the limit move in oil would be, after Saturday’s drone attack on the ‘’world’s most important oil processing plant’’. And moments ago, Brent crude reopened for trading, exploding almost 20% higher, its biggest jump in 28-years time.
Bloomberg notes that this attack has resulted in the single-worst disruption in oil markets ever, surpassing the loss of Kuwaiti and Iraqi petroleum supply in August 1990, when Iraq invaded its southern neighbor. It also exceeds the loss of Iranian oil output in 1979 during the Islamic Revolution, according to data from the U.S. Department of Energy.”
Furthermore, in light of news that the Saudi outage could last for months, this could be just the start. As a reminder, according to Morningstar research director, Sandy Fielden, “Brent could go to $80 tomorrow, while WTI could go to $75… But that would depend on Aramco’s 48-hour update. The supply problem won’t be clear right away since the Saudis can still deliver from inventory.”
Of course, should Aramco confirm that the outage will last for weeks, expect the Brent onslaught to continue until the price hits $80, and keeps moving higher.
Finally, here is the price summary from Goldman commodity strategist Damien Courvalin, who earlier today laid out four possible shutdown scenarios, and the price oil could hit for each:
- A very short outage – a week for example – would likely drive long-dated prices higher to reflect a growing risk premium, although short of what occurred last fall given a debottlenecked Permian shale basin, a weaker growth outlook and prospects of strong non-OPEC production growth in 2020. Such a price impact could likely be of $3-5/bbl.
- An outage at current levels of two to six weeks would, in addition to this move in long-dated prices, see a steepening of the Brent forward curve (2-mo vs. 3-year forward) of $2 to $9/bbl respectively. All in, the expected price move would be between $5 and $14/bbl, commensurate to the length of the outage(a six month outage of 1 mb/d would be similar to a six week one at current levels).
- Should the current level of outage be announced to last for more than six weeks, we expect Brent prices to quickly rally above $75/bbl, a level at which we believe an SPR release would likely be implemented, large enough to balance such a deficit for several months and cap prices at such levels.
- An extreme net outage of a 4 mb/d for more than three months would likely bring prices above $75/bbl to trigger both large shale supply and demand responses.
As investment banks like Goldman Sachs are drafting the potential price scenarios for crude. Geopolitical risk analysts are watching the reactions in Washington, Riyadh, Dubai and Tehran.
In a series of tweets on Saturday, Foreign Secretary Mike Pompeo was quick to point the finger at Iran, claiming that there was no evidence that the attack came from Houthi rebels in Yemen.
Tehran is behind nearly 100 attacks on Saudi Arabia while Rouhani and Zarif pretend to engage in diplomacy. 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.
— Secretary Pompeo (@SecPompeo) September 14, 2019
In the meantime, speculation is rife about where the attack exactly came from. According to Reuters, Kuwaiti security specialists are investigating the sighting of a drone over its territory and coordinating with Saudi Arabia and other countries after Saturday’s attacks on Saudi oil plants.
Next to this, Iraqi media reports suggested that the attack on Saudi oil facilities came from Iraq, but these claims were quickly denied by Baghdad, vowing to prosecute anyone using the country as a launchpad for attacks in the region.
With every stakeholder in the Persian Gulf on edge, it goes without saying that any retaliatory action could send crude prices soaring beyond $80 per barrel.