Record Moves in Oil
Its been an extremely volatile start to the week for oil markets. Traders are reacting to the news over the weekend of drone attacks on the world’s largest oil processing site in Saudi Arabia. The strike, which hit the Aramco controlled site at Abqaiq as well as the nearby oil field in Khurais wiped out a massive 5.7 million barrels of crude.
To put this in perspective, the attack erased around 50% of Saudi Arabia’s oil output and around 5% of total global oil supply. In response, crude prices gapped higher by over 20% at the open last night, marking their largest spike higher on record.
Who was Behind the Attacks?
The Houthi rebel group from Yemen, which has been behind a spat of attacks on Saudi pipelines, claimed immediate responsibility for the attacks. However, the US has accused Iran of being responsible for the attacks with US secretary of State Mike Pompeo blaming the attacks on Tehran. Pompeo told reporters there is “no evidence the attacks came from Yemen”.
“Amid all the calls for de-escalation, Iran has now launched an unprecedented attack on the world’s energy supply.”
Trump Joins In
Indeed, while not explicitly naming Iran, Trump wrote on Twitter:
“Saudi Arabia oil supply was attacked. There is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom as to who they believe was the cause of this attack, and under what terms we would proceed!”
Iran Says it is Ready for War
Iran responded immediately to the US accusations, denying claims it was behind the attacks, and warning that it is ready for war with the US. Iranian foreign ministry spokesman Abbas Mousavi said Washington was using a “maximum pressure” strategy against Iran, though due “its failure [the US] is leaning toward maximum lies”.
These comments come on the back of a warning from a senior commander in the Iranian Revolutionary Guard who warned that US military bases and aircraft carriers (some stationed as far as 1243 miles from Iran) are well within range of Iranian missiles, adding that Iran is ready for a “full-fledged war”.
Risk of War
Tensions between the US and Iran have been escalating significantly this year. Following earlier attacks on Saudi Oil tankers, as well as the shooting down of an American drone, the US deployed warships to the strait of Hormuz. At on point, Trump had reportedly approved a full air strike on Iran, only to then cancel the decision. As the world watches on, many fear that this latest episode has exponentially increased the chances of a full military conflict between the two nations.
While the geopolitical impact and threat of war is a major concern, higher oil prices should soften the blow for OPEC. Meeting last week, the group downgraded its global oil demand forecasts for this year and next and has said that it is considering further crude production cuts when it meets in December. At the group’s last meeting in June, it extended the production cuts which started in January, now due to run until the end of Q1 2020.
The ongoing trade standoff between the US and China is also driving oil prices. Crude had been trading higher earlier in the year as negotiations looked to be heading towards a deal but crashed when talks broke down in May as fresh tariff exchanges started. The market is now waiting for the next round of trade talks due this month following the re-starting of negotiations last month. Any positive developments should help keep oil supported in the near term.
The spike higher in crude saw prices breaking above the 61.03 June 2019 highs to trade highs of 62.26 before reversing back below the level. Price is now retesting the broken 58.67 level which is holding as support, for now. While above here, there is room for price to stabilise and continue to work higher. If we drop back below this level, however, focus will be on a retest of the broken bearish trend line from year to date highs next.