If there was any good news for trucking and transport companies as oil markets exploded Sunday night in reaction to drone attacks on the Saudi oil industry, it was that diesel prices rose less than the rest of the soaring oil complex.
At approximately 8 p.m. Eastern, two hours after trading for the day began worldwide, the global crude Brent benchmark was up 13.8% to $68.54/barrel, a gain of $8.28/b. WTI on CME rose $6.53/b to $61.38, an increase of approximately 11.9%. RBOB gasoline climbed 11.55%, up almost 18 cts/gallon, to $173.25/g. But ultra low sulfur diesel was up just 10%, 18.77 cts/g, to $2.0655/g.
The gains in the Brent market were said to be heading toward the biggest one-day increase in the history of the contract, which goes back to 1988. As for WTI, it was priced at a higher level than Brent back in 1990, when Iraq invaded Kuwait in early August. That disruption previously would have been considered probably the second-biggest single supply shock to the market; the first would have been the takeover of the Iranian government by Islamic fundamentalists in 1979, though price transparency then was nowhere near what it was today or in 1990.
When Iraq invaded Kuwait, WTI rose from $21.54/barrel on the day before the invasion to top out a bit more than $40/b 2 ½ months later. But it took two months to almost double (and then steadily retreated). The immediate reaction back then was nothing like what oil markets did on Sunday evening; WTI on the first trading session after the 1990 invasion rose 7.2%, significantly less than what markets have seen so far on Sunday evening U.S. time.
As far as the Iranian shutoff, energy economist Philip Verleger–who was an energy economist back then, when many of today’s observers were not even born–said the current Saudi disruption of 5.7-5.8 million b/d “is roughly comparable to the loss of Iranian crude in 1979. That disruption caused prices to triple.”
As the market opened for trading, the first expectation was that traders who went home Friday with a short position in the market–betting that the price would drop–would rush to cover their short positions and send the prices higher. While the motivation of all the trades that occurred in the first two hours of trading can’t be known, that certainly appeared to be the case.
Beyond that, as Sunday night in the U.S. moved into Monday, traders will be closely watching for reports that Saudi production had started to return.
The widely-respected consulting firm of Energy Aspects reported that about half of the 5.7 to 5.8 million b/d of lost Saudi production could be restored by Monday. No customers are expected to face a declaration of force majeure, which would allow the Saudis to walk away from their contracted sales. The country is expected to draw down its reserves to fulfill its sales requirements.
But getting half back on line Monday is a long way from full restoration. Even if half of 5.8 million b/d comes back on line, that’s still 2.9 million b/d off the market. Assume that the world oil market is sitting right at about 100 million b/d and the math is easy: 2.9%. Markets that suddenly have supply shocks of 2.9% do not return to their previous prices quickly.
Beyond the counting of barrels, the market is going to need to wrestle with the fact that the sort of nightmare scenario that the oil industry had always envisioned–an attack on Saudi facilities, particularly at the key processing center of Abqaiq–has happened. And it didn’t happen from a group of Islamist rebels, which always had been the assumed risk. Rather, it happened with a series of ten drones–other reports put it at 15–that did not risk the lives of any of Saudi Arabia’s enemies and did immense damage.
As legendary oil analyst Ed Morse of Citi said in a report, quoted by Bloomberg, “No matter whether it takes Saudi Arabia five days or a lot longer to get oil back into production, there is but one rational takeaway from this weekend’s drone attacks on the Kingdom’s infrastructure — that infrastructure is highly vulnerable to attack, and the market has been persistently mispricing oil.”
Beyond the speed at which the facilities are brought back on line, the market will also be closely watching for the release of strategic stocks either under the direction of the International Energy Agency or from the U.S. Strategic Petroleum Reserve, acting unilaterally on orders from President Trump. The IEA’s last coordinated release of strategic stocks was back in 2011, a few months after the Libyan uprising began. (The U.S. is a member of the IEA).
But one thing to note is that many of the stocks held by European countries are in the hands of private companies, and become strategic stocks when they are ordered to be released by the IEA. That is not the same thing as the in-ground oil supplies in the hands of the U.S. mostly in salt caverns in the Gulf region. Total stocks there are 644.8 million barrels.
As Verleger wrote in his weekly report about the structure of European strategic stocks, “This flaw in the European system has caused releases there to fall short of desired amounts in the past.”