WILL THE HARD LESSONS BE LEARNT?
Oil market has ignored Middle East risks and focuses on mounting US-China trade dispute, writes CLYDE RUSSELL
THE attacks on Saudi Arabia’s oil facilities have done more than knock out some five per cent of global crude supplies, they have provided a myriad lessons for all involved.
There is still a high level of uncertainty as to who, what and how exactly Saturday’s attacks were carried out on Saudi Aramco’s facilities, including the massive crude-processing plant in Abqaiq.
But what is certain is that 5.7 million barrels per day (bpd) of production has vanished and geopolitics is back driving the oil market.
This renewed risk was reflected in early price moves yesterday in global benchmark Brent crude futures, which surged as much as 20 per cent in early Asian trade, reaching a peak of US$71.95 (RM300) a barrel before easing back to around 13 per cent higher at US$68.22.
In recent months, the oil market has largely discounted geopolitical risk in the Middle East and chosen to focus on the mounting worries that the United States-China trade dispute is tipping the global economy towards recession.
The weekend attacks will have blown that market mindset out of the water, and the discussion will now be just how big should the risk premium be in the oil price.
Much will depend on just how
long the Saudi facilities are offline, with early speculation of a period lasting at least several weeks.
This may well tighten the crude market substantially, especially in Asia, which takes about twothirds of the cargoes from the world’s biggest crude exporter.
Yes, the Saudis can export from storage, the US and other countries can tap into their strategic reserves, and they can probably meet global requirements this way for several months.
US President Donald Trump authorised the release of crude from the Strategic Petroleum Reserve on Sunday, a move that may have tempered some of the rise in oil prices.
However, the longer the Saudi facilities remain offline, the more nervous refiners will become and the more likely they will be to pay a premium to ensure supplies.
For now, the crude market has been reminded that the whole oil market can be upended very quickly, and that the sector has a series of vulnerabilities that can be relatively easily exploited by those seeking to inflict maximum damage.
IRAN PUSHBACK
Another lesson is for Trump and his administration, and that is if you ramp up conflict and tensions with a country such as Iran, you must be prepared for the inevitable counter-punch.
The US has made it clear that it believes Iran is behind Saturday’s attacks, although it has yet to provide firm evidence of this.
But the chances are that this assessment is mostly correct and Iran, if not directly involved, is likely to have supported those who carried out the attacks.
This, of course, escalates the simmering tensions in the Gulf region, but it’s worth remembering this was started by Trump’s unilateral decision to withdraw from the agreement with Iran on its nuclear programme, despite evidence that Teheran was in compliance with the terms of the deal.
The sanctions on Iranian crude oil may not have taken its exports to zero as Trump wanted, but it certainly has cut them substantially, taking them from around 2.3 million bpd to a figure likely under one million bpd.
Would Iran have attacked, or acquiesced to one of its Middle East proxies directly targeting the vital part of Saudi Arabia’s oil infrastructure if the US had remained party to the nuclear deal?
The attacks increase the likelihood of an escalation of the conflict, with Trump already warning that the US is “locked and loaded” and ready to “hit back”.
The oil market now has to price in the possibility of an expansion of the current tensions in the Gulf into a shooting war in which the belligerents target each other’s crude infrastructure and exports.
There is also the possibility that once immediate emotions calm down, a more measured response emerges and tensions are de-escalated. But that will probably require that Trump reverses course, and allows Iran back into international crude markets.
Humiliating climbdowns aren’t exactly what Trump is known for, and he’s more likely to try and double down and escalate the conflict, without having a plan for how to resolve his issues with Iran.
The attacks should make it clear that Iran won’t back down and has the ability to wreak havoc in global oil markets.
What the market probably wants to see is a return to a period of cooler heads in global geopolitics, but chances are this doesn’t happen, and if it doesn’t, this risk will now have to factored into crude prices.