Over the weekend there was an attack on Saudi Arabia’s Abqaiq and Khurais plants which eliminated 5% of the world’s oil supply and disrupted the kingdom’s oil production.
Oil prices spiked on the news.
Brent crude oil jumped from US$60.22 to US$69.02 on Monday.
It has since come down to US$64.89, after Saudi Aramco announced that they expect output to go back to normal by the end of September.
Iran is getting the blame for the attack.
Truth is that tensions between US and Iran have been running high for quite some time.
Last year, the US abandoned the Iran nuclear deal and re-imposed sanctions on Iran’s oil exports. Yet the US ended up issuing exemptions for countries importing oil from Iran, which meant that supply didn’t take a hit then.
But in recent months, the US has ended exemptions and tensions have been once again escalating with Iran even threatening to close the Strait of Hormuz.
The Strait of Hormuz is a narrow passage located between Iran and Oman that connects the Persian Gulf to the ocean. It is critical to oil.
About 21% of the world’s global oil consumption goes through there. The US Energy Information Administration (EIA) calls it ‘the world’s most important oil transit chokepoint’.
Since then, we have seen oil tankers attacked near the Strait of Hormuz and drone attacks on two Saudi pumping stations. Iran also shot a US military drone they claimed was flying in their territory.
Oil prices haven’t really moved through all of this. Why?
It could have to do with the fact that the US is pumping a lot of oil.
Since 2009, the US has been rapidly increasing their oil production by tapping into shale oil through fracking. As you can see below, it has passed Saudi Arabia and Russia as a top world oil producer:
The increase in supply has put downward pressure on prices.
But prices certainly spiked after Saudi’s recent attack.
The big question now is: How long will it take Saudi Arabia to restore their oil output?
There are two different views here.
One is that Saudi Arabia will be able to restore production quickly and that there is plenty of oil to go around with high US shale production. But even then, there are increasing fears of more attacks.
The other is that Saudi Arabia could take longer than expected, and this could mean higher oil prices.
The incident has also exposed Saudi Arabia’s vulnerability as an oil producer. Something that could put a damper on Saudi Aramco’s IPO.
Saudi Aramco has been, since its creation, the country’s jewel, and Saudi Arabia is looking at taking their big company public in the near future.
In recent years we have seen record low oil prices due to higher oil supply from the US.
This is happening at the same time that global demand for oil is slowing. Last week OPEC revised their global oil demand growth down to 1.02 million bpd because of slower economic growth.
But in the meantime, risks are rising in the Middle East.
We are seeing tensions escalating between the US and Iran. These could decline very quickly, and if they go further we could see oil push higher.
Australia imports much of its crude oil and refined petroleum. Refined products imports have been increasing in recent years after several refineries in Australia have closed.
Any increases in oil would definitely affect us here.
Oil prices are quickly becoming a top story and any further deterioration could be bullish for oil.
PS: ‘Three Cutting-Edge Investment Markets for 2020 and Beyond’. Click here to download your Exclusive Investor Report.