Oil May Jump at Least $5 a Barrel After Saudi Arabia Attack
Extracted crude oil splashes on a worker’s hand as it’s being pours from a pipe in the village of Wonocolo, East Java, Indonesia. (Dimas Ardian/Bloomberg)

Oil May Jump at Least $5 a Barrel After Saudi Arabia Attack

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(Bloomberg) -- Oil traders and analysts expect prices to jump at least $5 a barrel Monday after a strike on a key facility cut Saudi Arabia’s production by half, pulling some 5% of world supply off the market.

Saudi Aramco lost about 5.7 million barrels per day of output after several unmanned aerial vehicles on Saturday struck the world’s biggest crude-processing facility in Abqaiq and the kingdom’s second-biggest oil field in Khurais. Saudi Arabia is likely to restore almost half the oil production lost, though a full resumption may take weeks. The Trump administration is ready to deploy the nation’s emergency oil reserves and help stabilize markets if needed.

Trading starts at 6 p.m. New York time. In early currency moves in Asia, the Norwegian krone and Canadian dollar strengthened -- both are exposed to oil sentiment.

Oil sank 2.1% in London to $60.22 a barrel last week and 3% in New York to $54.85, amid concerns that slowing demand growth may augur another supply glut. Geopolitics wasn’t much of a concern in traders’ minds, but that’s all changed now.

“There is almost no geopolitical risk priced into oil markets,” Joseph McMonigle, senior energy analyst at Hedgeye Risk Management LLC, said in a note. Markets have been “focused solely on the macro and trade narratives,” he said.

How Long?

While most analysts agree that prices will spike initially, the duration of the outage is key. Saudi Arabia has millions of barrels stored in locations around the world, which they can draw down to replace the lost production. A rally could also be tempered if the U.S. and other countries release oil from their strategic reserves to ease the shortfall.

  • “We would expect markets opening up at or near the circuit breaking limit of 7%” unless the Saudis say the damage isn’t too bad, Phil Flynn, senior market analyst at Price Futures Group Inc., said by phone
    • If WTI jumps 7% from Friday’s settlement, or $3.84 a barrel, in early trading, a circuit-breaker will kick in, pausing trading for two minutes, according to the CME Group website.
  • “The immediate impact on crude prices could be around $10 a barrel and we expect the impact could be around 5 dollars for weeks, as the situation in the Middle East just got more fragile,” Bjørnar Tonhaugen, head of oil market analysis at Rystad Energy, said by email
  • “We do NOT expect a shock in the market and prices as an effect of the drone attack on Saudi oil facilities, because the market is fully supplied,” Sara Vakhshouri, analyst at SVB Energy, said by email. The price rise Monday will be based on uncertainty over damage and duration of the outage, and fear of the possibility of repeat events, she said
  • ClearView Energy Partners LLC sees potential for prices to rise $10 a barrel, assuming a three-week shutdown, according to a note to clients. If damage turns out to be extensive and the outage is extended, they expect a loosening of OPEC+ supplies and a coordinated release of strategic reserves from the U.S. and elsewhere.
  • “Brent could go to $80 tomorrow, while WTI could go to $75,” said Sandy Fielden, director of research for Morningstar Inc. “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.”
  • “The initial move higher will depend on the strength of short-covering,” Ole Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen, said by email. “We finished last week on a weak note after monthly oil market reports pointed to a prolonged supply glut.”

Brent may rise more than WTI, as the potential for release from the SPR and growing domestic production could restrain the U.S. benchmark. Bloomberg Intelligence sees Brent climbing back toward levels last seen in April.

What Bloomberg Intelligence Says

“Brent should regain much of the premium lost to West Texas Intermediate over the past few months. Rapidly increasing U.S. supply, the likelihood of releasing crude from the Strategic Petroleum Reserve and potential for a ban on exports should provide a greater boost to the benchmark.”

Mike McGlone, commodity strategist

Heavy, high-sulfur crudes will also likely be in demand due to the type of oil that was taken off the market:

  • Andy Lipow, president of Lipow Oil Associates LLC in Houston, on Dubai: “I would expect sour crude differentials to get stronger given the Saudis exports are heavier and have higher sulfur crudes”

©2019 Bloomberg L.P.

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