Drone strikes on Saudi oil fields spike prices – New Europe
Geopolitical tensions and fears of longer-than-expected supply shortfalls led to Brent crude oil prices rising more than 1% on 19 September following the drone attacks on 14 September on the Abqaiq facility and the Khurais oil field in Saudi Arabia when Brent temporarily jumped over 20%.
According to Reuters on 19 September, Global benchmark Brent LCOc1 settled 80 cents, or 1.3%, higher at $64.40 a barrel, while US West Texas Intermediate (WTI) crude CLc1 pared earlier gains and ended largely steady at $58.13 a barrel, just 2 cents firmer.
The attacks on 14 September reportedly resulted in the temporary suspension of 5.7 million barrels per day of Saudi Arabia’s crude oil production, or around 5% of global daily oil supply.
“It’s not that major at the moment. It’s enough to give you headlines and give the market a fright but it’s not enough to actually change policy in terms of going in and expecting the price to rise dramatically,” Justin Urquhart Stewart, director at Seven Investment Management in London, told New Europe by phone on 17 September. “Now the price may well rise if there is another military attack, something like that, but I think market watchers will be sitting there saying, ‘no, it’s not supply, there is still a low level of demand,’” he added.
Urquhart Stewart argued that the global economy is slowing and there is still a lot of oil in the market. “No one wants to take a position. It’s not just a geopolitical issue. Blend that with a slowing economy around the world, there is going to be probably a fall in demand and the supply issues from Saudi Arabia are just seen as a short-term issue,” he said. “But the overall issue in terms of political situation – you got two layers: geopolitical and the economy. So geopolitical, we have no idea what’s gonna to happen next so don’t even try to bet at the moment. Then, you look at the global economy and all the signs are we are slowing up or will be heading for a recession at some stage, therefore, another reason not to get involved,” Urquhart Stewart said.
Tensions have escalated as the US and Saudi Arabia blamed Iran for the drone attacks despite a statement from the Houthi rebels in Yemen who claimed responsibility for the strikes. US President Donald Trump reportedly said the US was “locked and loaded” to hit back.
“If it heats up, then you will see a more dramatic spike in the price,” Urquhart Stewart said. “That’s where Trump gets dangerous because he will look into a simple knee-jerk reactions rather than a more intelligent response. If he thinks he is humiliated, he may end doing something unnecessarily dramatic just to show he is got the ‘cohones’ to actually carry it out,” Urquhart Stewart argued.
Riyadh has reportedly spent billions of dollars on cutting edge Western military hardware mainly designed to deter high altitude attacks but could not prevent low-cost drones crippling its oil industry. “It just shows now that simple technology can now do an awful lot more damage than people had perceived. I think people thought there was level of defence in Saudi Arabia or the ability to provide safeguards. But the answer is, no there isn’t because protecting an overall complex is incredibly difficult unless you have a really complicated radar structure or Israel’s Iron Dome but doing that for small areas is going to be extremely difficult,” Urquhart Stewart said.
Chris Weafer, a founding partner of Macro-Advisory in Moscow, wrote in an email to investors on 15 September that the oil price spike is good news for Moscow. “Russia will make more money for a while. Meantime, the price spike will boost Russia’s oil exports and oil tax revenue,” he said, adding that every extra $1 on the oil price means $7.5 million extra in export revenues every day, and 75% of that at this high price will go to the budget. Weafer said that Moscow is in a relatively comfortable position as the budget will breakeven at $49 per barrel this year and the government has said it is willing to see a lower ruble exchange rate to compensate for any oil price weakness, something that the Saudis and other Gulf states are unable, or unwilling, to do.
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