After posting the largest intraday rise (~$12) in history at the start of trading on Monday, Brent pulled back, paring around half of its initial 20% gain. Nevertheless, this is a historic day for crude, coming off the weekend attacks on Saudi Arabia’s oil infrastructure.
This is “the single biggest supply disruption ever in the history of the oil market”, BofA’s Francisco Blanch wrote Monday. “More importantly, Saudi is often viewed as the ‘central bank of oil’ due to the 2mn b/d or so of spare productive capacity that it can bring on line in short order to meet any unexpected global supply shortfall”, he added.
“We have never seen a supply disruption and price response like this in the oil market”, Credit Suisse’s Saul Kavonic marveled.
Aramco on Monday was said to be “less optimistic on the speed of output recovery”. Reports over the weekend suggested one third to one half of lost production could be back online by the end of Monday, although full restoration is expected to take weeks.
“Note that the world was already experiencing supply disruptions not seen in three decades due to losses in Iran and Venezuela”, BofA’s Blanch reminds you, warning that “with a portion of Saudi capacity now offline, the global economy is now facing what can be considered the largest oil supply shock ever”.
“If there is a requirement, Saudi Arabia will call for it and if that happens we will deal with it”, UAE Energy Minister Suhail Al Mazrouei told reporters in Abu Dhabi on Monday. “Most important is the understanding of the situation, I think it’s early, so give us some time, let’s hear from the officials in Saudi Arabia and we are always supportive and cooperating”, he continued.
Exports were expected to continue “as normal” this week as the kingdom draws on supplies from storage facilities, Reuters said Sunday. There’s some ambiguity around the stock question. “The level of such stocks remains uncertain, with JODI reporting global stocks owned by Saudi Arabia at an eleven-year low of 188 mb and Kayrros showing Saudi and Egypt combined crude inventories at 101 mb, 17 mb above their Jan-18 lows”, Goldman wrote Sunday. The bank went on to say that uncertainty notwithstanding, “high levels of inventories can accommodate a relatively large draw”. Meanwhile, the bank says “the ongoing OPEC+ production cuts leave room for other producers to increase output”.
Donald Trump on Sunday said the US would tap the SPR if necessary. “The largest SPR is in the US, where the sharp decline in crude and product net imports has left it at an elevated level”, Goldman remarked. “Key of course there will be the ability to draw on these inventories”, the bank went on to say. “Test sales over the past several years have pointed to logistical bottlenecks and quality issues”.
The Houthis – who claimed responsibility for Saturday’s attacks – warned that more strikes are in the offing.
“We assure the Saudi regime that our long hand can reach wherever we want, and whenever we want”, a spokesman said in a menacing statement. “We warn companies and foreigners not to be present in the facilities that were hit in the strikes because they are still within range and may be targeted at any moment”.
Rick Perry isn’t amused – or actually, Rick Perry is always amused, but he put on his straight face for the occasion. “We wholeheartedly condemn Iran’s attack on Saudi Arabia. We call on other nations to do the same”, he said in Vienna, calling Iran’s behavior “unacceptable”. “They must be held responsible”, he insisted.
The effect on prices is expected to linger, irrespective of how quickly Aramco restores production and no matter how determined the global response. As noted here over the weekend, the market largely ignored geopolitical turmoil over the summer, preferring to focus on the prospect of demand destruction from the trade war. Although flareups in the Strait of Hormuz prompted temporary price spikes, the effect was fleeting. Now, that looks to have been a mistake.
“With global oil inventories declining for several months now, the disruption to Saudi facilities comes at a particularly difficult time [as] a number of supply shocks have impacted the oil market in the past 18 months, with Venezuela and more recently Iran having a disproportionate impact on global oil supplies”, BofA’s Blanch said Monday, in the same note cited above.
Blanch went on to reiterate that the world is currently witnessing “the largest levels of oil supply disruptions since Iraq invaded Kuwait almost three decades ago”. That’s the backdrop against which the attacks on Aramco are set.
“With a large portion of Saudi capacity now offline and no ‘oil lender of last resort’ available to fill the gap, the world economy is now easily facing the largest oil supply shock ever”, Blanch said.