Oil prices have jumped more than 10 percent after a coordinated drone attack hit the nucleus of Saudi Arabia’s oil industry on Saturday, forcing the world’s largest exporter of crude oil to cut its output in half.
As of 0157 GMT Monday, International benchmark Brent crude futures rose by $6.69, or 11.11 percent to $66.91 per barrel. U.S. West Texas Intermediate crude futures jumped $5.41 or 9.86 percent to $60.26 per barrel.
Traders have scrambled to calculate what the limit move in oil would be, after Saturday’s drone attack on the world’s most important oil processing plant. And moments after Brent crude reopened for trading, it exploded by almost 20 percent higher, its biggest jump in 28-years.
Bloomberg notes that this attack has resulted in the single-worst disruption in oil markets ever, surpassing the loss of Kuwaiti and Iraqi petroleum supply in August 1990, when Iraq invaded its southern neighbor. It also exceeds the loss of Iranian oil output in 1979 during the Islamic Revolution, according to data from the U.S. Department of Energy.”
In light of news that the Saudi outage could last for months, this could be just the start. As a reminder, according to Sandy Fielden, Morningstar research director, “Brent could go to $80, while WTI could go to $75.”
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.
“Of course, should Aramco confirm that the outage will last for weeks, expect the Brent onslaught to continue until the price hits $80, and keeps moving higher,” Fielden said.
Depending on the duration of this outage, four scenarios present themselves according to ZeroHedge, an economics blog online covering financial issues, geopolitics, and trading.
A very short outage of a week, for example, would likely drive long-dated prices higher to reflect a growing risk premium, although short of what occurred the same time last year, given a debottlenecked Permian shale basin, a weaker growth outlook, and prospects of strong non-OPEC production growth in 2020. Such a price impact could likely be $3-5 per barrel.
An outage at current levels of two to six weeks would, in addition to this move-in long-dated prices, see a steepening of the Brent forward curve (2-month versus 3-year forward) of $2 to $9 per barrel respectively. All in, the expected price move would be between $5 and $14 per barrel commensurate to the length of the outage (a six-month outage of 1 million barrel per day would be similar to a six week one at current levels).
Should the current level of outage be announced to last for more than six weeks, it is expected Brent prices would quickly rally above $75 per barrel, a level at which a strategic petroleum reserves (SPR) release would likely be implemented, large enough to balance such a deficit for several months and cap prices at such levels.
An extreme net outage of 4 million barrels per day for more than three months would likely bring prices above $75 per day to trigger both large shale supply and demand responses.
As investment banks like Goldman Sachs are drafting the potential price scenarios for crude. Geopolitical risk analysts are watching the reactions in Washington, Riyadh, Dubai, and Tehran.
