Major Saudi oil facility attacked; 5 MMBbl/d of Production At-Risk

September 14, 2019
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Much is yet to be determined about the duration of a price response, but AEGIS expects near-term tenors to rise going into Monday’s US trading. If a fleeting issue, this is an excellent opportunity for US producers to hedge with swaps. Option markets may also give more value for call options when markets shape up on Monday. 

5 MMBbl/d of production could be offline for a undetermined amount of time after a major oil facility was attacked overnight.
Yemeni Houthi rebels, a group reported to have deep ties to Iran, took credit for the attack, which used as many as 10 unmanned aerial vehicles (“drones”), per The Wall Street Journal. The paper reported half Saudi Arabia’s production could be shut-in. AEGIS notes Saudi Arabia’s recent production was just shy of 10 MMBBl/d.
Later quotes from Saudi Arabian officials, reported by Bloomberg, said production could be brought back quickly.
Let’s consider some scenarios for what this could mean to oil prices and curve structure.
  • In Asian and European trading that begins Sunday, Brent crude is likely to lead the way with higher prices
  • The Brent curve is likely to increase its backwardation, the degree to which the curve slopes downward
  • Tenors further down the curve will likely rise at a diminishing ratio to the increase in the front of the curve
  • The number of tenors seriously affected in the front of the curve would be influenced by how long the market perceives the Saudi outage to last, and if there could be other outages or attacks to follow
  • WTI will likely rise with Brent, but may lag slightly behind. A wider spread between WTI and Brent would represent:
    • the desire, but inability, for the US to export more barrels abroad, and
    • implication of lower imports into the US coastal markets, including the Gulf Coast
AEGIS will be providing additional guidance via market alerts through the day on Monday.

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