Oil Stockpiles Cap Price Surge After Saudi Attack
September 16 2019 - 8:41AM
Dow Jones News
By Joe Wallace and Caitlin Ostroff
The world is flush with excess oil, a factor that put a cap on
the increase in crude prices following the attacks on the heart of
Saudi Arabia's oil industry.
The price of Brent crude spiked 20% to a high of $71.95 a barrel
when Asian trading opened on Monday, which would have been the
global benchmark's biggest one day rise in more than 30 years. But
by the U.S. morning, Brent had retreated to $65.75, a gain of 9.2%,
as traders gauged how much extra inventory is available to meet the
demands of the global economy.
Stockpiles of oil world-wide could be released to curtail
another threat to the weakening world economy if the disruption in
Saudi Arabia is prolonged. The weekend attacks knocked 5.7 million
barrels a day off the kingdom's oil production. That is equivalent
to almost 6% of world-wide consumption each day, according to the
International Energy Agency. On Sunday, President Trump said he
authorized the release of oil, if needed, from the Strategic
Petroleum Reserve to help offset cost increases.
"If [the disruption] is measured in weeks, it sounds like
there's enough in storage in various locations" in Saudi Arabia for
the kingdom to meet its obligations to customers, said Saad Rahim,
chief economist at commodity trading house Trafigura. But if the
outage lasts more than around four weeks, then Saudi could start to
have difficulties and prices are likely to further, he added.
Saudi Arabia's own stockpiles of oil have fallen in recent
years, but remain sufficient to ensure the kingdom's customers
don't experience shortages provided the disruption is relatively
short-lived. The nation holds around 188 million barrels of crude
and 97 million barrels of refined-oil products in storage,
according to Amarpeet Singh, an analyst at Barclays, enough to
cover the country's exports for around 35 days.
On top of domestic stockpiles, Saudi Arabia also stores oil
close to key consumers in the Americas, Europe and Japan. "A lot of
oil is pre-positioned close to the markets where their consumers
are based," said Harry Tchilinguirian, head of commodity strategy
at BNP Paribas.
A key question for energy traders is how much damage has been
done to Abqaiq, a massive processing plant at the heart of Saudi
Arabia's energy system that was targeted in Saturday's attack. The
kingdom is racing to restore around one-third of capacity knocked
out by the attacks on Abqaiq and on the Khurais oil field by the
end of Monday, The Wall Street Journal reported.
"The longer Abqaiq is down, the higher the risk to exports," Mr.
Tchilinguirian said.
Members of the IEA, including the U.S., are required to hold
emergency stocks of oil that could cover 90 days' worth of lost
imports. They can deploy these reserves in unison to avoid an oil
shock, as in June 2011, when the U.S. and 27 other countries acted
to release 60 million barrels of oil from strategic reserves to
drive down prices during disruption caused by the civil war in
Libya.
The U.S. holds around 600 million barrels of oil in reserve and
other governments have a further 1.2 billion, said Oswald Clint, a
senior analyst for Sanford C. Bernstein & Co.
Even more oil is held commercially, though this cannot be
released deliberately by officials to avoid an oil shock.
Commercial inventories stand at about 2.9 billion barrels, down
from 3.3 billion in 2015 and 2016, Mr. Clint said. This figure used
to be higher because of falling demand, he added.
Although a major oil shortage isn't imminent, a long outage in
Saudi Arabia is likely to keep oil prices elevated because the
market depends on the kingdom to ramp up output in times of crisis.
The ability of other members of the Organization of the Petroleum
Exporting Countries to boost output at short notice has diminished,
while shale producers in the U.S. are under pressure from
shareholders to show discipline and not over-invest in new
production capacity.
Heightened tensions in the Middle East, the falling chances of a
rapprochement between the U.S. and Iran, and the vulnerability of
Saudi energy infrastructure are also likely to push oil prices
higher even if there is enough oil for energy consumers to tap.
"This is a significant escalation in the region," said Chris
Midgley, director of analytics at S&P Global Platts. "If you
start taking supply out of the biggest producer in the world, that
is crucial."
--Pat Minczseski contributed to this article.
Write to Joe Wallace at Joe.Wallace@wsj.com and Caitlin Ostroff
at caitlin.ostroff@wsj.com
(END) Dow Jones Newswires
September 16, 2019 08:26 ET (12:26 GMT)
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