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Crude spikes after Saudi drone attack; Trump orders strategic release

Javier E. David
Editor focused on markets and the economy

The United States authorized a release of crude from its Strategic Petroleum Reserve (SPR) on Sunday, seeking to offset the expected loss of supply stemming from a drone attack on key Saudi Arabian oil installations that sent prices on a tear.

President Donald Trump announced that he ordered a release from the SPR, which contains over 700 million barrels. A drone attack over the weekend — carried out by Houthi rebels from Yemen backed by Iran — reportedly crippled Saudi Arabian crude production by half.

With the global economy decelerating, crude prices have been entrenched in a bear trend. Yet on Sunday, both international Brent crude (CL=F) and U.S. oil futures spiked by over 10%, as markets anticipated Saudi supply would be at least temporarily crimped by the attack.

The drawdown of the U.S.’s emergency oil stocks underscored the severity of the situation, and the concerns about global supply. The SPR, which was last tapped in 2011, is an “emergency response tool” used in cases when the loss of global supply is considered disruptive to the world economy.

Chris Midgley, S&P Global Platts’ head of analytics, said that the ratcheting up of geopolitical tensions warrants an additional $5-$10 premium on global oil prices — and could break above $70. On Friday, oil settled around $55 per barrel.

‘Locked and loaded’

The unexpected attack on Abaqiq — a linchpin of Saudi Arabia’s global oil production — has rattled the markets and stoked new fears about Riyadh’s ongoing conflict with Yemen.

Meanwhile, Iran’s suspected involvement raises questions about whether the U.S. could be draw into a confrontation. Secretary of State Mike Pompeo immediately accused Tehran of masterminding the attack, which the Iranian government denied. Via Twitter, Trump said the U.S. was “locked and loaded” for a potential response.

“Unquestionably, oil prices will be up significantly when the market opens on Monday,” said Mark Dubowitz, CEO of the Foundation for the Defense of Democracies, a non-partisan research institute.

Given the centrality of Abaqiq to Saudi production, the attack “will have significant impact on the global oil prices,” Dubowitz said.

The Saudi kingdom is one of world’s largest repositories of oil, churning out around 10 million barrels per day. It was not immediately clear how long it will take for the country to replace the supply lost by the assault on Abaqiq.

Goldman Sachs said in a note on Sunday that a brief outage that lasted no more than a week could boost crude by $3-5. However, Saudi’s oil being offline for two to five weeks could send prices up by as much as $14 per barrel — and anything longer than that could easily buttress oil above $75, the bank said.

“Saudi Arabia has a lot of oil in storage now and most likely the attack will not result in a physical shortage of oil,” according to Dubowitz.

“Regardless, there will be a sustained rise in the global oil price, since it is now clear that the Saudi production and export is vulnerable to attacks, and clearly Iran though its surrogate Houthis will continue to strike at Saudi Arabia, as part of its efforts to get out of the sanction regime.”

The attacks also come as Saudi Arabia’s oil company, Aramco, is preparing to float an initial public offering that could be one of the world’s largest.

Analysts say that the attack complicates the country’s IPO plans, and raises questions about the long-term security of the country’s reserves from future attacks from rebels, or Iran.

“The latest attack on Aramco facilities will have only a limited impact on interest in Aramco shares as the first stage of the IPO will be local,” said Ayham Kamel, Eurasia Group’s practice head for the Middle East and North Africa.

“The international component of the sale would be more sensitive to geopolitical risks,” he added.

Javier David is an editor for Yahoo Finance. Follow Javier on Twitter: @TeflonGeek

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