Saudi Attack Reveals System Vulnerability

  1. A few missiles halt five percent of global production
  2. Younger oil regions offset losses
  3. Price action not explosive
  4. Natural gas prices rise, encouraging new production

Al pic 2009_cropped

Alan Levine, Chairman of Powerhouse


The Matrix

An attack on Saudi Arabian oil facilities halted 5.7 million barrels daily of production on September 14.    The details of who was responsible, how significant the damage was, and how soon facilities would be functional remain cloudy even one week later. The strike revealed several concerns that shape global oil markets through availability and price.

The vulnerability of the global oil distribution system was perhaps the most significant thing demonstrated by the attack. Relatively few explosives were able to cut more than half of Saudi Arabia’s oil output, amounting to about five percent of world production.

The development of newer production regions eased the impact of the loss of Saudi supply. The growth of U.S. shale fields has been a remarkable story in its own right. Production has moved to 12.4 million barrels per day in EIA’s most recent supply report. Exports of crude oil from the United States reached 3.175 million barrels daily, an important contribution to world supply, easing the impact of the loss of Saudi crude oil.

The availability of non-Saudi oil to offset any shortages showed in price action following the attack. Crude oil spot futures reached a high of $55.68 on Friday, September 13. Prices opened next trading day at $61.48, leaving a gap of $5.80. Attempts to fill the gap have not been successful, but neither have efforts to make highs greater than the $63.38 high registered in the exaggerated trading of the hours following the Saudi attack.

There has been little follow-through in price since then. The gap in price remains, and crude oil trading has settled into a narrow trendless range around $58.50. Resistance stands just below $64. Elliott Wave analysis suggests prices are entering a bullish phase with a target around $70.00.


Supply/Demand Balances

Supply/demand data in the United States for the week ending September 13, 2019, were released by the Energy Information Administration.

Total commercial stocks of petroleum rose by 0.9 million barrels during the week ending Sept. 13, 2019.

Commercial crude oil supplies in the United States increased 1.1 million barrels from the previous report week to 417.1 million barrels.

Crude oil inventory changes by PAD District:
PADD 1: Plus 0.3 million barrels to 10.8 million barrels
PADD 2: Down 2.0 million barrels to 122.2 million barrels
PADD 3: Plus 2.0 million barrels to 219.9 million barrels
PADD 4: Plus 0.3 million barrels to 19.6 million barrels
PADD 5: Plus 0.4 million barrels to 44.6 million barrels

Cushing, Oklahoma inventories fell 0.6 million barrels from the previous report week to 38.7 million barrels.

Domestic crude oil production was unchanged from the previous report week at 12.4 million barrels per day.

Crude oil imports averaged 7.050 million barrels per day, a daily increase of 326,000 barrels. Exports fell 120,000 barrels daily to 3.175 million barrels per day.

Refineries used 91.1 percent of capacity, down 3.9% from the previous report week.

Crude oil inputs to refineries decreased 788,000 barrels daily; there were 16.707 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 743,000 barrels daily to reach 17.145 million barrels daily.

Total petroleum product inventories fell 0.2 million barrels from the previous report week.

Gasoline stocks increased 0.8 million barrels daily from the previous report week; total stocks are 229.7 million barrels.

Demand for gasoline declined 867,000 barrels per day to 8.939 million barrels per day.

Total product demand decreased 1.178 million barrels daily to 20.262 million barrels per day.

Distillate fuel oil stocks increased 0.4 million barrels from the previous report week; distillate stocks are at 136.7 million barrels. EIA reported national distillate demand at 3.859 million barrels per day during the report week, an increase of 55,000 barrels daily.

Propane stocks increased 2.9 million barrels from the previous report week; propane stocks are 100.7 million barrels. The report estimated current demand at 714,000 barrels per day, a decrease of 577,000 barrels daily from the previous report week.


Natural Gas

Natural gas prices rallied in sympathy as crude oil reacted to the loss of Saudi barrels. They reached $2.70 before falling off during the rest of the week. By week’s end, prices were back to pre-attack levels. Some analysts have argued that oil prices could remain elevated even after restoration of full production, encouraging U.S. producers to expand output, bearish for natural gas.

According to the Energy Information Administration:

Net injections into storage totaled 84 Bcf for the week ending September 13, compared with the five-year (2014–18) average net injections of 82 Bcf and last year’s net injections of 84 Bcf during the same week. Working gas stocks totaled 3,103 Bcf, which is 75 Bcf lower than the five-year average and 393 Bcf more than last year at this time.

The average rate of net injections into storage is 28% higher than the five-year average so far in the refill season (April through October). If the rate of injections into storage matched the five-year average of 10.7 Bcf/d for the remainder of the refill season, total inventories would be 3,617 Bcf on October 31, which is 75 Bcf lower than the five-year average of 3,692 Bcf for that time of year.


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