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Oil prices likely to surge at Sunday’s opening after a “different” type of Saudi Arabia disruption

Oil Pump and Oil Barrels on Saudi Arabia Map isolated on white background. 3D render

After months of overall stability in the market for oil, prices are almost surely going to go on a roller-coaster when global markets open at 6 p.m. Eastern time on Sunday, September 15.

A drone attack on numerous Saudi oil facilities–including a possible attack on the Shabya field, one of the country’s largest, and the key processing facility at Abqaiq–was possibly carried out by Houthi rebels who are in a battle with Saudi-backed forces for control of Yemen. The Houthis have claimed credit but the conspiracy mills are mulling whether the attack was undertaken by Iran, which has backed the Houthis, or even forces inside Iraq loyal to Tehran.

That is secondary to consumers of oil like truckers, railroads, or other forms of transport. What is primary is that as what could best be described as “oil twitter” reviewed the attack, and the news that about half of Saudi production is shut in as a result of it, debate swirled about how much prices will rise when markets resume trading and how long they are likely to stay there. 

For trucking companies, the timing is particularly bad. Trucking companies that handle fuel surcharges would be looking to adjust those charges after the Department of Energy/Energy Information Administration retail diesel price gets published late Monday. That price at $2.971/gallon effective last week was likely to move up at least a cent based on retail trends seen in the DTS retail price data from SONAR.

But that one-to-two cent increase is not likely to reflect what very might happen at the pump this week. Those retail movements–if it is assumed they will be higher–will not be reflected in the DOE/EIA price until the number released September 23. There is always a lag but this one might be particularly painful for trucking companies.

The market reaction heard among oil observers about the attacks on the Saudi facilities come down to one statement: this one is different.

It’s different because it was carried out by as many as 15 drones–estimated cost per drone, about $15,000, total, about $225,000 to send prices soaring–and because this relatively cheap investment in equipment resulted in Saudi Arabia being forced to cut its production in half. 

It’s different because there have been attacks on tankers in the Persian Gulf; there were rockets launched against Saudi Arabia in the first Gulf War. There have been attempted sabotage attacks by Islamists inside the Kingdom. None have taken out half the country’s production–about 5.8 million barrels/day, according to press reports–like these attacks have.

And it’s different because while the Houthis may have claimed responsibility, the U.S. is blaming Iran, raising the prospect for some sort of military escalation and retaliation. 

That is why the reaction when markets open at 6 p.m. Eastern time Sunday is likely to be swift, with lots of green arrows pointing upward. There is no trading on the weekend to give any indication how high the price may pop. Saudi officials have said the shutdowns are temporary and their duration might be counted in days, not weeks or months. But the fallout from the realization that the Saudi oil facilities are vulnerable to drones will last beyond any repairs.

It is entirely possible that product markets like ultra low sulfur diesel (ULSD) will not increase as rapidly as crude will, but that’s because crude has always been seen as having more of a role as a financial asset as well as being the feedstock to make refined products. That role as a financial asset is also shared by refined products but generally not as much, particularly as markets undergo their initial reaction.

The price at the pump takes several steps to get to the numbers on the sign sitting out on the corner. As crudes like Brent and WTI go through their machinations on key exchanges, and gasoline and ultra low sulfur diesel do as well, physical diesel markets in key locations can be moving at rates higher or lower than the commodity market. For example, in the past week, ultra low sulfur diesel on the CME declined about 5 cts/gallon. But the national ULSD wholesale rack price only dropped 3.3 cts over the course of the week because physical markets in New York Harbor and in the Gulf of Mexico, relative to that CME price, were stronger. The rack prices take their cue from the physical markets. 

Those wholesale rack prices are what retailers pay, or they pay a price tied to the physical markets. Either way, the physical market, and not just the CME ULSD price, is the most important factor determining the rack price and by extension the retail price.

Retail prices have long been criticized for going up rapidly when commodity and wholesale prices are rising rapidly–as they are likely to do this week–but for moving much more gradually on the way down. (“Up like a rocket, down like a feather” is the cynical description).

Decisions on retail prices are made by the individual retailer owners, not pricing executives at oil companies. Their last decision-making point in the supply chain is the rack price and those prices need to be reflective of physical market conditions. If not, customers not required to buy a certain brand’s fuel can easily move their business elsewhere. It is the retailer–the truck stop owner, the convenience store chain owner–that is making the decision about retail prices and is more independent in setting their numbers.

Any sort of extended disruption of Saudi supplies could be compensated for by joint action among the members of the International Energy Agency to release parts of their strategic stocks. 

On Twitter, the IEA said it is “monitoring the situation in Saudi Arabia closely. We are in contact with Saudi authorities as well as major producer and consumer nations. For now, markets are well supplied with ample commercial stocks.”

The U.S. has the largest strategic stocks. A spokeswoman at the U.S. Department of Energy, quoted by Reuters said it ‘Stands ready to deploy resources from the Strategic Petroleum Oil Reserves if necessary to offset any disruptions to oil markets as a result of this act of aggression,” and that it would work with the IEA.

There was a coordinated release of IEA stocks in 2011 as the uprising against Moammar Gaddafi regime sank that country’s output.  

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John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.