Saudi attack sends oil price soaring
Vesna Poljak and Peter Ker
Sep 15, 2019 — 11.59pm
Drone strikes on Saudi Arabia's energy infrastructure claimed by Yemen's Iran-backed Houthi rebels have sent oil prices soaring on Monday in another blow to stability in the Gulf region.
Saudi Aramco confirmed more than 5 million barrels of oil production a day would be immediately lost, equivalent to 5 or 6 per cent of global supply. Mike Pompeo, the US Secretary of State, accused Iran of the "unprecedented" rebel attack on "the world's energy supply".
In a scenario that echoes Vale's Brazilian tailings dam collapse in January, and which sent iron ore to a five-year high, investors are expecting shares of energy producers to rally on Monday when trading re-opens.
"This is certainly the most serious attack on Saudi oil infrastructure to date," said Ben Cleary, a portfolio manager of the Tribeca Global Natural Resources Fund. "Continued escalation in the Gulf culminating with Saturday's attack may be a game-changer with respect to how the market prices supply risk."
Brent crude surged to almost $US72 a barrel on Monday, from $US60.22 on Friday, before the attack. It pulled back to under $US70 after frenetic trading. Oil could hit $US80 to $US90 a barrel over the next few months, NAB predicted, depending on the length of the outage.
Federal energy minister Angus Taylor said there was "no immediate threat" to Australia's supplies after the US also insisted its reserves were ready to meet any production shortfall.
"The government is working with our international partners to fully understand the impact of the incident in Saudi Arabia," Mr Taylor said. ''The International Energy Agency [IEA] has advised that global markets are well supplied with ample commercial stocks and are monitoring the situation.
"Australia is ready to work with IEA and member countries as needed.''
Aramco runs the world's single-largest oil processing facility, at Abqaiq. A separate attack at its Khurais field also caused a blaze, but no injuries were reported.
"These are the largest assets in the world. The tensions have been building for months and the market has not been pricing in the risks," Mr Cleary said, referring to previous attacks in May by rebel groups that threatened to disrupt Saudi oil supply.
Saudi Crown Prince Mohammed bin Salman has backed the Saudi Arabia- and UAE-led intervention in Yemen.
The crown prince, known as MBS, conveyed to US President Donald Trump the kingdom's "willingness and strength" to respond to this act of "terrorist aggression", the official Saudi press agency reported. The same report, which was shared by the Saudi embassy in Washington, said Mr Trump "reasserted his country's readiness to co-operate" and underscored the negative effects "on the US economy as well as the world economy".
An oil price shock could dent resurgent optimism around global growth with last week's easing of trade tensions between the US and China.
Aramco itself has been pursuing a partial sharemarket float and last week selected a handful of Wall Street banks to work on the long-speculated deal. It was thought at the time Aramco could list as soon as November, but it is still evaluating a secondary listing on an overseas exchange.
Those plans look set to be interrupted by the apparent vulnerability of its facilities demonstrated by the latest strikes.
NAB's head of commodities markets research, Lachlan Shaw, speculated that faced with a net outage of 2 to 4 million barrels a day for several months, oil producers will have to draw on inventories to meet demand. As well as the 5.7 million barrels of daily oil production, 2 billion cubic feet of gas output is offline.
OPEC members have around 2 million barrels a day in spare capacity within reach, but even if OPEC and Russia lift production that will cover "less than half" the outage. Non-OPEC producers are almost at capacity, Mr Shaw said.
The market is awaiting further updates from Aramco.
Commodities markets were "reasonably" short physical oil heading into the events of this weekend, Tribeca's Mr Cleary estimated.
"This should see oil prices much higher in the short term and these attacks also come at a seasonally very strong time for demand," he said.
"The demand concerns over recent months have largely coincided with refiners running down stocks globally which has fed the bears' narrative that trade wars were impacting global growth and therefore oil demand."
The hedge fund manager warned of a "double whammy" of stronger demand and weaker supply over the next few months. From a stocks perspective, valuations are at "record low" levels compared with their respective commodity prices.
But unlike the months-long disruption caused by Vale's cuts to iron ore production, energy markets have more scope to snap back. Vale admitted it would be three years before it returned to full capacity. The fires at Aramco's sites have been contained.
The International Energy Agency said on Saturday: "For now, markets are well supplied with ample commercial stocks." It is monitoring the situation. Its oil market report issued last week estimated global demand grew by 1.3 million barrels a day year-on-year to the end of July, with oil prices 20 per cent lower than a year ago.
Last week, Australia's Department of Foreign Affairs and Trade confirmed that three Australian citizens had been detained in Iran.
A blogger who had been travelling in Asia with her Australian boyfriend, as well as an academic who had studied at Cambridge University and was lecturing at a university in Australia had been detained in separate incidents.
Vesna Poljak is The Australian Financial Review's Markets Editor. She covers equities, bonds, currencies and the economy with a special interest in the investment industry, hedge funds and accounting. Vesna is based in the Sydney newsroom. Connect with Vesna on Twitter. Email Vesna at vpoljak@afr.com
Peter Ker covers resource companies, based in Melbourne. Connect with Peter on Twitter. Email Peter at pker@afr.com
Big investor slashes bank exposure
Go for growth, McKeon tells NAB's new-look leadership
Analysts desert CBA ahead of results
Kogan.com shares plunge as profit growth slows