Shock and awe, but few surprises as oil prices spike
The drone attacks that hit Saudi Arabia’s oil production facilities in Abqaiq and Khurais this weekend knocked out 5.7 million barrels of daily crude production, that is about 50% of the country’s output and over 5% of global oil production. Oil futures prices jumped almost 20% on the news as markets opened on Monday in Asia, while shares in oil companies also spiked.
Brent spiked 19% to $71.95 (€64.50) a barrel, while US crude jumped 15% to a session-high of $63.34 a barrel. Brent futures rose 9.96% to $66.22 per barrel and US crude futures jumped 8.93% to $59.75 a barrel.
But analysts said a severe shock to energy markets and the world economy is unlikely.
“We’ve probably seen the best of the oil price rise today,” David Lennox, resources analyst at Fat Prophets, told CNBC on Monday. “We really can’t see any real significant change in the longer-term oil price because of this,” he added. “We do believe that…they will start to actually repair that facility fairly quickly.”
OPEC has in fact been more worried in recent months about oversupply rather than shortages.The oil producers organization, along with Russia and other producers last week even called for tighter application of ongoing production cuts aimed at propping up prices. Saudi Arabia has taken on most of the cuts, producing less than 10 million barrels per day of crude, way below its OPEC production target.
Daniela Corsini, an economist at Intesa Sanpaolo in Milan, told DW: “After weeks of concerns about the expected weakness in global crude demand, now security of supplies is the main focus. For the first time the market is starting to price the vulnerability of Saudi infrastructure to attacks, while Saudi Arabia used to be perceived as one of the most reliable suppliers.
A satellite image shows an apparent drone strike on an Aramco oil facility in Abqaiq, Saudi Arabia.
“Geopolitical risk premiums sharply rose. I expect that over the next days, crude prices will trade close to an average level of $65 for Brent and $60 for WTI. In fact, the market remains well supplied as Saudi Arabia could deplete its inventories to compensate for the lower output, while both the U.S. and the IEA could release their strategic reserves in the event of extreme market tightness.
“Over the next quarters, volatility will remain a predominant market feature. I still expect that crude oil prices could trade most of the time in the upper part of a range between $55-$75.”
Where do Saudi exports go?
The top export destinations of Saudi Arabia are China ($29.1 billion, €25.4 billion), Japan ($25 billion), India ($19.4 billion), South Korea ($17.7 billion) and the US ($17.3 billion).
How long to repair?
A key uncertainty is how long it will take for the Saudis to repair the facilities.
If they are fixed quickly, Eurasia Group estimates that oil prices may rise only $2 to $3 a barrel, leaving Brent below $65 a barrel. A more long-lasting disruption could mean an increase of $10 a barrel, the group said. Saudi Aramco said on Sunday that repairs were already underway.
High reserves
US President Donald Trump has authorized the release of oil from the US’ strategic petroleum reserve if needed.
Such an attack a few years ago might have sent oil prices rocketing, but the US today produces about 12.1 million barrels a day, double what it did in 2012 and 1.4 million barrels more than only a year ago. The US imports only about 630,000 barrels of Saudi oil a day, down about half from 2017. US oil facilities have also been spared from the hurricane season, while a slowing global economy has moderated demand.
Global oil stockpiles are also higher than usual and many producing countries have spare capacity. Other oil-producing countries are also increasing production, including Norway and Brazil, while Iraq, Nigeria and Russia have been producing a total of 650,000 barrels of oil above the levels agreed to with their OPEC partners.
The US and other developed countries have nearly 3 billion barrels in stockpiles, according to the International Energy Agency, about two months of demand.
Saudi Arabia has roughly 27 days of supply stockpiled, according to SP Global Platts, a provider of energy information. That stockpile is stored not only in the kingdom but also Egypt, Japan and the Netherlands for added security.
But it all depends..
“The events in Saudi Arabia have ratcheted up tensions in the Middle East to a new level raising concerns about supply security,”Chris Midgley, global head of analytics at SP Global Platts said in a statement. “The sudden change in geopolitical risk” could cause crude prices to jump between $5 and $10 a barrel, Midgley said.
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Hit hard by sinking oil prices
A great, big hangover
Even Norway isn’t immune to the falling price of oil. For years, the wealthy Scandinavian nation had fueled its rapid growth with the oil it pumped out of the North Sea. But what once transformed a poor agrarian state into one of the richest countries in the world now has policymakers wondering if it wouldn’t be wiser to allocate more resources to Norway’s fishing industry.
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Hit hard by sinking oil prices
Double trouble
For Russia, the falling price of oil has added insult to injury as its economy is already reeling under Western sanctions. In 2015, economic output in the country shrunk by around 4 percent. As a result, salaries have dropped and the ruble has lost half of its value against the dollar. The news service Bloomberg estimates that 2016 will be another recessionary year for Russia.
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Hit hard by sinking oil prices
An uncertain future
Nigeria is Africa’s largest producer of oil. Before being elected president, Muhammadu Buhari announced that he would increase government spending – but the drop in the price of oil may make that promise impossible to fulfill. The World Bank estimates that three-quarters of the Nigerian state’s revenues come from the oil business. Many infrastructure projects are currently on hold.
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Hit hard by sinking oil prices
New realities
Nigeria’s not the only country that calculates its budget based on the price of oil staying high. The result has been a big gap between expected and actual revenues. The price for a barrel of oil has dropped by nearly 75 percent since mid-2014. Many experts currently have little reason to believe the per-barrel price will return to its old level of $120 (110.76 euros) anytime soon.
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Hit hard by sinking oil prices
After sanctions
Now that sanctions against Iranian exporters have been lifted, the Islamic Republic plans to ramp up its oil production by half a million barrels a day – putting further pressure on an already oversupplied energy market. Iran, for its part, blames its archrival Saudi Arabia for falling oil prices.
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Hit hard by sinking oil prices
Less giving, more taking
Saudi Arabia has refused to curb oil output in order to protect its market share from competition from the US fracking industry and Iran. But now, even the world’s largest oil exporter is starting to get a taste of its own medicine. The International Monetary Fund is warning about a massive impending budget deficit. The Saudis want to introduce taxes and slash energy and food subsidies.
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Hit hard by sinking oil prices
How long will reserves last?
Like their Saudi counterparts, other oil-rich Gulf statessuch as Qatar, Oman and the United Arab Emirates are also watching their energy reserves dwindle. These regional powers all boast large sovereign wealth funds – but altogether, the six Gulf states have already accumulated a budget deficit worth $260 billion (239.8 billion euros), according to estimates by JP Morgan Chase.
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Hit hard by sinking oil prices
Winds of change in Venezuela?
Venezuela has the largest oil reserves in the world. For years, the country’s socialist government used revenues from the sale of oil to fund its lavish social programs. Now, President Nicolas Maduro has declared a state of emergency for the Venezuelan economy. Popular support for the successor to Hugo Chavez has been slipping for about a year – about as quickly as the price of oil has dropped.
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Hit hard by sinking oil prices
What now?
Thanks to a boost in shale gas extraction, aka fracking, the US is now the world’s largest energy producer. Low oil prices, however, have made fracking widely unprofitable. The US is also one of the largest consumers of energy in the world. While motorists may celebrate having to spend less money at the pump, bigger, gas-guzzling vehicles are gaining in popularity – bad news for the environment.
Article source: https://www.dw.com/en/shock-and-awe-but-few-surprises-as-oil-prices-spike/a-50445086?maca=en-rss-en-all-1573-rdf