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Saudi Oil Crisis Far From Over As Riyadh Formulates Responses

By Investing.com (Barani Krishnan/Investing.com)Market OverviewSep 18, 2019 04:13AM ET
www.investing.com/analysis/saudi-oil-crisis-far-from-over-as-riyadh-formulates-responses-200465594
Saudi Oil Crisis Far From Over As Riyadh Formulates Responses
By Investing.com (Barani Krishnan/Investing.com)   |  Sep 18, 2019 04:13AM ET
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The greatest crisis in nearly 50 years for oil’s largest exporter appears to have ended in just 72 hours. Or has it?

With what seemed like the wave of a magic wand, Saudi Prince and Energy Minister Abdulaziz bin Salman said almost half of the output lost from the weekend attacks on the Kingdom’s oil facilities has been restored. What’s more, in two months, total Saudi output would be even higher than before the attacks, he assured.

Deceiving Calm After The Storm

By the looks of it, this tranquility could be more deceiving than thought.

Whatever the market’s understanding of the Saudis’ crisis management and turnaround skills from the Sept. 14 hits on their gigantic Abqaiq crude processing complex and Khurais oilfield, one thing looks clear: Riyadh’s problems are far from over.

Brent 1-Hour Chart - Powered by TradingView
Brent 1-Hour Chart - Powered by TradingView

Crude prices, which jumped almost 15% on Monday on fears that the Saudi supply outage could last weeks or even months, sank nearly 7% in the next session on Prince Abdulaziz’s assurances. Yet, volatility is likely to get worse in the coming days, weeks and months as Riyadh’s actions risk not matching up to its words.

Protecting Aramco IPO

While market and industry participants may be skeptical with the lightning speed at which the Saudis moved to announce relief for their energy business and plants struck in the aerial raids, many interestingly seem to understand the Kingdom’s motives.

At the heart of the Saudi action is its determination to protect at all cost the upcoming IPO of state oil company Aramco, which, despite boasting the promise of being the world’s largest planned share sale with a total targeted valuation of $2 trillion, has been beset with woes since it was conceived in 2016.

The Question Of ‘Face’

Then, of course, there’s the need to show the Kingdom’s enemies, primarily Iran and Yemen’s Houthi rebels—though the jury is still out on which of the two planned and executed the attacks—that the dignity and might of Saudi Arabia hasn’t been hurt.

John Kilduff, founding partner at New York energy hedge fund Again Capital, said:

“The IPO is all-important to the Saudis and they can’t let it sink now.”

“Also, this attack is a huge embarrassment for them and they need to put up a brave face against the Houthis and the Iranians.”

The Need To Avoid Force Majeure

Lastly, there’s another urgency that may be as important but which the Saudis would rather not talk about — the avoidance of force majeure, which would mean the inability to deliver on contracted cargoes of oil.

For a country known for over four decades as the ultimate shipper of oil under any condition, including war, and as the last bastion of spare supply during oil price shocks, Saudi Arabia simply cannot afford a taint on that reputation, especially with the upcoming Aramco IPO.

However, Prince Abdulaziz’s conjuring away of Saudi Arabia’s post-attack problems does not seem credible at all.

On the contrary, the Kingdom may be starting an all-new crisis for itself in how it responds to the attacks.

What are those responses?

Production Ramp-Up Issues

Let’s begin with the so-called production ramp-ups.

If indeed, damage to the Abqaiq and Khurais facilities can be as easily fixed as the Saudi energy minister suggests, then meeting or even exceeding his output targets won’t be a problem. If not, the opposite will be true.

Prince Abdulaziz said Saudi Arabia will have the ability to produce 11 million barrels per day (bpd) by the end of September and 12 million bpd by end-November.

Saudi Arabia produced 9.85 million bpd in August. The last time it produced as much as 11 million bpd was nearly a year ago, in November 2018.

Since the start of 2019, the Kingdom has been cutting supplies steeply to fulfill the OPEC+ agenda of rebalancing the world market from oversupply.

While the Saudis also have the ability to turn up the spigots at any time—August being an occasion when they did—adding more than 1 million bpd in total crude production this month itself looks questionable, especially after days of outage at Abqaiq.

According to Aramco CEO Nasir Ameen, some 2 million bpd has been restored at Abqaiq, which had a 4.9-million bpd output before the attacks. He added that full production would be achieved by end-September.

But with less than two weeks left to the month, it raises doubts again on how attainable such a target is.

Those in the know question the time needed to fix fire-damaged pipelines and patch and test more than a dozen storage tanks. If, for any reason, Saudi supplies fall short of contracted sales, Riyadh might just negotiate privately with the affected customers to buy more time on delivery, rather than declare a force majeure.

Investor Concern

Of course, all this wouldn’t be assuring to would-be investors of Aramco if the market hears of such problems when the company isn’t listed yet. Perhaps, the Kingdom’s recently reported decision to float its shares on the Saudi bourse—instead of original international destinations such as New York and London—will help it secure domestic investor support, regardless of the troubles at Aramco.

A Counter-Attack On Iran?

Then we come to the so-called loss of face and what the Saudis intend to do about that. This is perhaps the most significant response that will come out of the Kingdom because it will likely involve a counterstrike on Iran.

Bloomberg reported that Saudi Arabia will hold a news conference on Wednesday evening outlining Iran’s role as well as the weapons used in the attacks. This is likely the “explainer” that will lay the ground for retaliation against Tehran. Iran has officially denied any role in the attacks, but the Saudis and the Trump administration think differently,

The Washington Post reported that Saudi Arabia could engage in a strike that the United States would support with intelligence, targeting information and surveillance capabilities. But the U.S. itself would not fire any weapon at Iran, in line with Trump’s stance of being “locked-and-loaded to respond” but “not ready for war”.

Potential Iranian targets for the strike include the Abadan oil refinery, one of the world's largest, or Kharg Island, Iran's biggest oil export facility. Attacks on either location would significantly impede Iran's ability to process and sell oil.

Other possibilities include hitting missile launch sites, bases or other assets belonging to the Islamic Revolutionary Guard Corps — the elite Iranian military unit blamed for much of Iran's paramilitary operations against adversaries outside the country.

Saudi Oil Crisis Far From Over As Riyadh Formulates Responses
 
Saudi Oil Crisis Far From Over As Riyadh Formulates Responses

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Barani Krishnan
Barani Krishnan Sep 18, 2019 10:25AM ET
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Thanks all for your feedback. As always, appreciate if you could could follow us @Investingcom. My handle is @barani_krishnan
inderjeet virk
inderjeet virk Sep 18, 2019 9:11AM ET
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the other fearful factor for Saudi arabia is non-opec production increase to fill the gap caused by attacks.saudis will never let that happen.
Barani Krishnan
Barani Krishnan Sep 18, 2019 9:11AM ET
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Ha ha ... Forgot that one :) Absolutely, Inderjeet!
Martin Beach
Martin Beach Sep 18, 2019 8:56AM ET
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interesting if the drone swarm actually came from within SA.
Barani Krishnan
Barani Krishnan Sep 18, 2019 8:56AM ET
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Anything's possible, Martin. Truth is a rare commodity on the Arabian peninsula ... or for that matter, anywhere in the world these days.
Ahmad Sherhan
Ahmad Sherhan Sep 18, 2019 7:48AM ET
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whether Prince is lying or not, does not matter - for traders - if anyone want to go long oil - we need to watch out carefully Saudi prosuctuon in two weeks time.
erik maguina
erik maguina Sep 18, 2019 7:48AM ET
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ur r correct thanks for the note
Keith Reilly
Keith Reilly Sep 18, 2019 7:48AM ET
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no one is going long oil ...its a loser. The US is awash in it. Oil price will be below all this hype in 2 weeks. Before all this oil was DOWN 16% over the past year..why ? Because we have more than we need for decades. No one cares who can buy it.
Barani Krishnan
Barani Krishnan Sep 18, 2019 7:48AM ET
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You're right. We're going to have tons of volatility but the market's going to stretch to be in the green each day if the Saudis continue acting like as though all's well, when the truth might be different. And thar truth is what will give oil its geopolitical premium.
Law Florida
Law Florida Sep 18, 2019 7:11AM ET
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Prince is lying! It's very controversial what he said on Saturday and what he bumbled on Tuesday!
Luu Hung
Luu Hung Sep 18, 2019 7:11AM ET
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Yes he is. As always
Rajan Bhandari
Rajan Bhandari Sep 18, 2019 5:11AM ET
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thank you so much for such a information so what you think upcoming month oil price is going to look like ?
Barani Krishnan
Barani Krishnan Sep 18, 2019 5:11AM ET
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A lot of volatility ahead, Rajan. Too hard to make a hard call, though I'd say $65 will a good resistance for Brent in coming days and its probably $55 for WTI if supply gets even more than thought. Not immediate calls though.
 
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