Items filtered by date: September 2019

Monday, 30 September 2019 01:01


Oil prices have retreated back to the pre- strike levels as Aramco reports it has  restored full production capacity. Their  prompt actio has  made markets reluctant to demand much, if any, oil price risk premiums, as if we are to believe what we are told, the Saudi's have the ability to quickly recover from any production outage.

Crude oil prices gained traction after Pentagon announced that the United States will be deploying military equipment and support personnel to Saudi Arabia in response

to the drone and missile attacks aimed at  Saudi Arabian oil facilities earlier in September. In plain speak the US will now be manning Saudi air defense. It is a fudge of sorts as the man in the Whitehouse has one eye on re-election in 2020 and seems determine not to be drawn into any military scale action in the Middle East.

However given Saudi Arabia's ostentatious purchase of American military hardware, one might be justified in questioning quite why they need the US to defend the Kingdom. The Saudis have spent over $80 billion on arms bought from the UK and the US in the last couple of years and between 2014- 2018 were the largest global importer of arms. If these arms are not going to be used to protect the Kingdom then what is the point of buying them?

 The Saudi strategy seems clear, these multi billion dollar purchases firmly establish a symbiotic relationship which allows the Saudis to  leverage the US and  its western allies of  whom arms it buys  and who in return are prepared to overlook  Saudi’s human rights abuses, assassinations and other excesses  because there is too much money to be made. A foreign policy model which not only uses its vast oil wealth to buy silence, but  uses  its strategic position as the largest global oil exporter ( and swing supplier)to get its allies to defend it.

 The simple truth is that Saudis do not fight their own battles, they typically and historically hire mercenaries or employ proxies  from other poor countries and pay them well enough to keep them  fighting. The conflict in Yemen supposedly prosecuted by a Saudi led  “ Arab coalition” , is a clear illustration of this policy. The Saudi led coalition

 which  includes mercenary forces from Egypt, Jordan and Morocco, as well as Sudanese child soldiers do all the fighting. Then the substantitve question must be, is it an acceptable proposition for the Whitehouse to employ US lives to defend and support the  proselytization  of Saudi Arabian sectarianism? It is difficult  to exaggerate the  paranoia that exists in the minds of Sunni Arabs about the threat from Shia Islam and a Persian – Iran.

If a "locked and Loaded" US intervene to support a Sunni agenda the most likely outcome is a calamitous destabilisation of the region which is the least desirable outcome for the US.  All at a time when the fidelity of the 'special relationship' between Riyadh and Washington has lost much of its lustre. The US no longer rely on Saudi oil, accounting for less than 10% of total US imports. The Saudi Arabia led Operation Decisive Storm disasterous intervention in Yemen civil war supporting an ousted Sunni  government has created the world's worst humanitarian crisis. It has created a Sunni - Shiite proxy war which if care is not taken will engulf the whole region. But importantly it has created a vociferous lobby in Washington that vilifies the  tenor of the Washington-Riyadh relationship and is opposed to Saudi actions in Yemen.

 There are clear signs that the US-Saudi relationship forged in 1945 is coming to an end. Though the US have imposed additional sanctions on the Iranian Central Bank and deployed 200 odd more support troops, for what Pompeo, the Secretary of State classified as an act of war, the US response has been muted. Indeed there has been push back in Washington from 'progressive' actors that see the relationship with the Saudis as immoral and incompatible with US values. President Trump has even intimated that the US are now energy independent, the inference being the value of the Saudi relationship to the US has diminished. Whilst his observation might be slightly premature, the direction of travel is spot on.

Published in OIL MARKETS

President Trump said Wednesday he will tighten the economic screws on Iran, as the U.S. and Saudi Arabia begin to coordinate a response to the drone strikes on the kingdom’s oil processing facilities. US intelligence has put Iran firmly in the frame, though beyond the wreckage of crashed drones , currently there is no definitive evidence.

As a consequence oil prices extended their losses today as the market evaluates Trump's strategy of extending economic sanctions seemingly making a military response unlikely in the wake of the attacks on key Saudi Arabian oil installations last week.

Earlier today WTI futures were down at $58.12 a barrel, compared to $58.73 a barrel immediately before the Trump tweets. Dated Brent was at $63.37, down 1.7% on the day and down from $63.92 before the tweets. Oil prices had already fallen steeply on Tuesday, after Saudi Arabian Energy Minister Prince Abdulaziz bin Salman had said the kingdom expects to restore oil production levels to pre-attack levels by the end of the month.

Trump said via Twitter that he had “"just instructed the Secretary of the Treasury to substantially increase Sanctions on the country of Iran!" . Secretary of State Mike Pompeo is meeting Wednesday with Saudi leaders to discuss the Saturday drone strikes that disrupted the global oil supply. It seems unlikely that such a meeting will produce a grand plan of military action.

Saudi Arabia has adequate inventories to cover for the supply gap, but only for a few weeks. Though worryingly it has emerged that much of the country’s spare capacity may have become unusable, if only temporarily. And because Saudi Arabia accounts for the majority of the entire world’s spare capacity, the disruption would not leave a lot to fall back on. Prince Abdulaziz bin Salman has done a sterling job in allaying the fears of the oil market and convincing it that Saudi Arabia can quickly restore production.

There are however substantive issues which need to be assesed. Several days after the attack took place, it is still unclear how and what exactly struck the Abqaiq facility, or where the strike emanated . This raises the spectre of future attacks. Given the size of the processing facility it is a colossal single point of failure which amplifies supply side vulnerability. If as the Houthis would have us believe, they were responsible for the strike, they now alarmingly possess the capability to create global economic calamity. This is a risk that has been mispriced by the market and it will be interesting to see how the market reacts in the coming days as counter-measures are devised to mitigate the risk.

Some defense hawks in the U.S. want Trump to send a more forceful message. Notably Sen. Lindsey Graham, South Carolina Republican, he said Tehran might have interpreted President Trump’s decision to call off a military strike in June as a sign of weakness. President Trump who it now seems clear does not want to get embroiled in a war in the Middle East rejected that view, saying he is operating from a position of strength as the administration applies “maximum pressure” on Iran through sanctions.

Published in OIL MARKETS


The Houthi Rebels conjure up a picture of a poorly trained and ill equipped fighting force, the sort that would seek refuge in caves or a djebel somewhere in the desert. But like so many of the rag-tag resistance groups that have come before them, they are proving endlessly resilient. According to Gulf News ten automated, aerial, combat drones launched an attack on Saudi Aramco’s Abqaiq plant in Buqyaq and the Khurais oil field on Saturday at 3:31 a.m. and 3:42 a.m. local time. Attacks on Saudi Arabia's pivotal Abqaiq processing facility and Khurais oil field have raised questions over the vulnerability  of the kingdom's production capability. Saudi Arabia said the drone attacks on saturday had caused them to  suspend the production of 5.7 million barrels of oil a day (almost 6% of global production)  but re-iterated  export customers would continue to be supplied from inventories; Saudi stockpiles totalled 187.9 million barrels in June. 

 The Abqaiq facility is the single most important facility in Saudi's oil industry, it is Aramco's largest oil processing facility and processes about 50% of the company's crude oil production.  Khurais is the second biggest oil field.

 After a number of strikes on key oil infrastructure and shipping routes this attack is a potential game changer. In recent times flows had been temporarily halted through Saudi Arabia's main oil transport pipeline to terminals and refineries on the Red Sea, whilst  oil tankers have come under attack  in the Persian Gulf, but nothing of this magnitude which palpably demonstrates the Houthi ability to punish Riyhad severely. That is of course if we accept that it was carried out by the Houthi and not the Iranians. The US seem in no doubt, Despite the Houthi rebels claiming  responsibility for the strikes, the American Secretary of State blamed Iran,  rejecting the claims by Yemen's Iran-backed Houthi rebels that they had carried out the attacks. Kelly Anne Conway also stated " "The Iranian regime is responsible for this attack on civilian areas and infrastructure vital to our global energy supply, and we're not going to stand for that... We will continue our maximum pressure campaign in Iran."  Iran's Foreign Minister Javad Zarif responded by saying that "blaming Iran won't end the disaster" in Yemen.

 I must raise the question of quite how these drones penetrated  the expensive Saudi air defence systems to hit strategic targets so deep inside the county's territory.  The US Fifth Fleet is based in Bahrain, and America has air bases and other facilities along the Gulf from Kuwait to the UAE protected by its air defense. It seems odd that these drones were able to  seek  and destroy their targets uncontested  and under the radar. It is difficult to fathom and perhaps only time will tell.

It has to be said that over the last year or so the Houthis have developed their capacity to hit targets in both the UAE and Saudi Arabia. A Houthi drone hit a Saudi Aramco oil refinery outside the capital Riyadh in July, a company executive and a Gulf official said. That month, a Houthi drone evaded Emirati air defenses and exploded at Abu Dhabi’s international airport in the United Arab Emirates. These strikes have been denied by the saudi, emerati and US authorities and the Houthis derided as a backward, tribal group that lacks sophistication. Such a narrative allays concerns and allows any blame to be directed at Iran, a more technically sophisticated and politically ameanable foe. The WSJ in an article published in May highlighted increasing Houthi sophistication

The attack will cause a spike in crude oil benchmarks particularly dated Brent, on monday morning, this commentator believes the market is likely to go into steep backwardation, Platts Analytics have forecast  that additional risk premiums "could see prices test $80/b despite Saudi assurances that, " production and exports will not be significantly impacted ".

Saudi crude is generally a mix of heavy to medium sour oil, which is generally high in sulphur and yields a decent amount of residual fuel and vacuum gasoil. particularly popular and well suited for the  complex Saudi Chinese JV refineries and those in Asia, US and Europe which can crack heavy sulphurous crudes, and still yield distillate products due to the refiners having complex secondary units.

 Dominic Raab, the Foreign Secretary, called the strikes an “egregious attack on the security of Saudi Arabia" and a "reckless attempt" to disrupt global oil supplies. Yet he is quiet when Saudi warplanes with British munitions bomb school buses and kill innocent children

Published in OIL MARKETS

Nigeria has pledged to cut production by 57,000 barrels a day to comply with its agreed OPEC+ quota. This vow came as the joint marketing monitoring committee formed by OPEC and its allies known as OPEC+ met on Thursday in Abu Dhabi prior to the policy decision making meeting in Vienna scheduled for December 5th. According to the International Energy Agenc (IEA) Nigeria produced 2.386 million barrels of oil daily in August. Though that estimate is misleading. Under the agreement Nigeria should produce no more than 1.685 million barrels per day it agreed to in December 2018. Yet Nigeria can claim 600,000 barrels included in the IEA report are condensates which are not quota restricted and fall outside any production cuts. According to the secondary sources OPEC uses to calculate official production and compliance rates in August, Nigeria pumped 1.866 million bpd, up by 86,000 bpd from July.

Brent crude Oil prices have dropped below $60 in recent weeks with oil demand looking bleak off the back of the on going US-China trade war. There has been some suggestion that OPEC+ may consider further cuts but Saudi Arabia’s new energy minister, Prince Abdulaziz bin Salman, said deeper cuts would not be decided before a meeting of the Organization of the Petroleum Exporting Countries planned for December.

Overall the meeting yielded promises to keep countries within the production quotas they committed to in the global supply cut deal, which would limit oil coming to the market as Nigeria, Iraq and Russia have, at times, produced more than their allocations. Though Saudi’s Prince Abdulaziz reiterated his country committment to cut more production than it pledged in the pact. The Joint Ministerial Monitoring Committee concluded that another 400,000 bpd would be taken out of the market if OPEC+ members complied with their quotas

The medium term oil outlook is further complicated by US shale output, whose surging production has created the bearish sentiment in the market. It is complicated because I remain uncertain that there is enough tier 1 basins in the US that can support sustainable production growth. If President Trump gets his way and the Fed go negative on rates it lends shale a life line, but in my opinion could ultimately create the same sort of debt bubble as sub-prime. On the evidence of the last quarter shale production is no longer surging though even current levels of production contribute significantly to market overssupply.

The Paris based International Energy Agency (IEA) kept its oil demand growth forecasts for 2019 and 2020 at 1.1 million bpd and 1.3 million bpd, respectively. The IEA forecast that demand for Nigeria’s and by extension OPEC+’s oil will reduce to 28.3m bpd in the first half of 2020. This at a time when Iran and Venezuela are under sanctions and Libya struggling. Though the EIA confirmed last week that the US crude inventory is at its lowest for over a year. The US stockpile of crude oil dropped by nearly 7 million barrels last week, but the bullish data did little to support crude oil benchmarks. Especially at a time when it seems that President Trump's tepid willingness to engage with Iran's President Rouhani might see him consider easing oil sanctions on Iran. The addition of Iranian barrels in to the market would plunge oil prices at a time the Saudis are committed to bolstering the barrel price.

I like many commentators see the appointment of Prince Abdulaziz Salman as a clear indication of the Saudi's strategy to boost the barrel price prior to a Aramco IPO. This is why I believe further cuts are inevitable. The sale of Aramco will provide a windfall for the Saudi government which they need to exponentiate. This means bending OPEC+ to their will whilst continually pumping under their own quota in a bid to boost crude oil prices.


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Despite taking the scenic route, which included an unscheduled detention in Gibraltar and a meandering sometime convoluted voyage, the  MT Adrian Darya 1 finally reached its disport. Iran has confirmed that the tanker formerly known as MT Grace 1 suspected of trying to deliver Iranian oil to Syria in defiance of EU sanctions has now sold its cargo. Confounding both the EU, UK and the US and to their chagrin
The most recent Satellite images taken last friday, appeared to show the vessel, MT Adrian Darya-1 just off the coast of Syria. Yet Tanker Trackers a vessel tracking service purport to have satellite imagery which shows the vessel is fully laden. 

Tehran will be triumphant and perhaps now deal promptly with the little matter of the MT Stena Imperor. Notably the Iranian foreign ministry spokesman would only go as far as to say the ship had delivered its cargo after docking "on the Mediterranean coast". The spokesman did not give the name of the 'Buyer'. The US has been trying to seize the tanker since it was released by Gibraltar. It issued a warrant and blacklisted the vessel, threatening sanctions on any country which offered it aid. The ship had been been tracked sailing east across the Mediterranean. As is now the practise of Iranian crude oil tankers, they periodically go dark by deactivating their transponders, making it more difficult for them to be monitored. Though it would not be difficult to spot if the vessel is fully laden. 

The US state department confirmed earlier in the week it offered millions of dollars to the captain of vessel. Brian Hook, head of the department's Iran Action Group, emailed the captain of the MT Adrian Darya 1 in an attempt to entice him to sail it somewhere the US could seize it.

Satellite imaging company Maxar released photographs which purports to show the MT Adrian Darya-1 about two nautical miles off the Syrian port of Tartus on Friday. Following the emergence of these satellite images on Saturday, the UK's Foreign Office called the reports of the ship's presence near Syria "deeply troubling". Yet being in close proximity to Syria is not definitive evidence that the tanker has discharged its cargo, so the Iranian announcement could still be a hoax intended to divert attention.

Gibraltar ,the British overseas territory released the ship - despite strong protests by the US - after it said it received written assurances from Iran that the vessel would not head for countries under EU sanctions. Tehran has subsequently denied it made any such promises about the ship's destination. If what Gibraltar state is true, then it would be a simple matter to publish the said document or make it available for scrutiny. In any event any such document is irrelevant to the extent that it cannot be used to enforce any meaningful sanction against Iran. It is quite likely that Gibraltar would have requested some sort of assurance that the cargo was not going to be delivered to any entity under EU sanctions.

Though Gibraltar and the UK maintain there exists a legal basis for seizing oil tankers which breach EU restrictions. It seems tenous and fraught with political considerations. Not least why the EU are enforcing sanctions on Iran whilst simultaneously breaching their own JCPOA committments.

Published in OIL MARKETS

The American Petroleum Institute (API) had estimated a crude oil inventory build of 401,000 barrels for the week ending Aug 29, compared to analyst expectations of a 3.50-million barrel draw. There will be an explanation for the disparity but that is not the most important thing at the moment

Had that been confirmed by EIA figures, the inventory build this week would have taken away from last week’s draw in crude oil inventories of 11.1 million barrels, according to API data. The EIA estimated that week there was an inventory draw of 10.0 million barrels. It is on such figures that bulls are reared. The implication being a steady inexorable draining of OECD crude inventories, on the way to balancing the market.

However the EIA bemused oil traders  after Labor Day, when it reported that U.S, crude supplies declined by 4.8 million barrels for the week ended August 30 in line with analysts previous calculations. If nothing else this episode has re-inforced to the market the effect of the inventory numbers have on it.  It has also  perhaps emphasised the importance of the EIA and their numbers to the detriment of the API. Is it now conventional wisdom to wait for the EIA numbers?

Currently apart from  China's GDP growth and PMI numbers and possibly with the exception of Trump's oil market tweets, the inventory figures have had the most pronounced effect on global oil market benchmarks as the markets actors see them as reliable integers of market equilibrum for pricing reasons.

The EIA report went on further in detailing U.S. crude oil refinery inputs which averaged 17.4 million barrels per day during the week ending August 30, 2019, which was 27,000 barrels per day less than the previous week’s average. Refineries operated at 94.8% of their operable capacity last week. Gasoline production decreased last week, averaging 10.3 million barrels per day. Distillate fuel production decreased last week, averaging 5.2 million barrels per day.
U.S. crude oil imports averaged 6.9 million barrels per day last week, up by 976,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged about 6.9 million barrels per day, 12.5% less than the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 717,000 barrels per day, and distillate fuel imports averaged 126,000 barrels per day.
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.8 million barrels from the previous week. At 423.0 million barrels, U.S. crude oil inventories are at the five year average for this time of year.


Published in OIL MARKETS