Author Archives: MKL Supply

Oil may jump as much as $10 a barrel after Saudi Arabia attack

Category : News

By David Marino on 9/15/2019

NEW YORK (Bloomberg) – Oil analysts expect prices to jump at least $5 to $10/bbl Monday after a strike on a key facility cut Saudi Arabia’s production by half, pulling some 5% of world supply off the market.

Saudi Aramco lost about 5.7 MMbpd of output after several unmanned aerial vehicles on Saturday struck the world’s biggest crude-processing facility in Abqaiq and the kingdom’s second-biggest oil field in Khurais. It could take weeks to restore normal production, according to people familiar with the matter. The Trump administration is ready to deploy the nation’s emergency oil reserves and help stabilize markets if needed.

Oil sank 2.1% in London to $60.22/bbl last week and 3% in New York to $54.85, amid concerns that slowing demand growth may augur another supply glut. Geopolitics wasn’t much of a concern in traders’ minds, but that’s all changed now.

“There is almost no geopolitical risk priced into oil markets that are focused solely on the macro and trade narratives,“ Joseph McMonigle, senior energy analyst at Hedgeye Risk Management LLC, said in a note.

While analysts agree that prices will spike initially, the duration of the outage is key. Saudi Arabia has millions of barrels stored in locations around the world, which they can draw down to replace the lost production. A rally could also be tempered if the U.S. and other countries release oil from their strategic reserves to ease the shortfall.

“We can expect oil prices to be $5/bbl higher when it opens,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston. “The events over the weekend show the vulnerability of oil facilities in the Mideast.”

ClearView Energy Partners LLC sees potential for prices to rise $10 a barrel, assuming a three-week shutdown, according to a note to clients. If damage turns out to be extensive and the outage is extended, they expect a loosening of OPEC+ supplies and a coordinated release of strategic reserves from the U.S. and elsewhere.

“Brent could go to $80 tomorrow, while WTI could go to $75,” said Sandy Fielden, director of research for Morningstar Inc. “But that would depend on Aramco’s 48-hour update. The supply problem won’t be clear right away since the Saudis can still deliver from inventory.”

“The initial move higher will depend on the strength of short-covering,” Ole Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen, said by email. “We finished last week on a weak note after monthly oil market reports pointed to a prolonged supply glut.”

Brent may rise more than West Texas Intermediate, as the potential for release from theStrategic Petroleum Reserve and growing domestic production could restrain the U.S. benchmark. Bloomberg Intelligence sees Brent climbing back toward levels last seen in April.

“Brent should regain much of the premium lost to West Texas Intermediate over the past few months. Rapidly increasing U.S. supply, the likelihood of releasing crude from the Strategic Petroleum Reserve and potential for a ban on exports should provide a greater boost to the benchmark.”


Coordinated drone attack cuts Saudi oil production in half

Category : News

By Javier Blas and Nayla Razzouk on 9/14/2019

DUBAI (Bloomberg) – Saudi Arabia’s oil production was cut by half after a swarm of explosive drones struck at the heart of the kingdom’s oil industry and set the world’s biggest crude-processing plant ablaze.

Saudi Aramco Abqaiq facility

Saudi Aramco Abqaiq facility

Saudi Aramco has had to cut production by as much as 5 MMbpd after the attack on the Abqaiq plant, according to a person familiar with the matter. Iran-backed Houthi rebels in Yemen, who have launched several drone attacks on Saudi targets, claimed responsibility.

The biggest attack on Saudi Arabia’s oil infrastructure since Iraq’s Saddam Hussein fired scud missiles into the kingdom during the first Gulf war, the drone strike highlights the vulnerability of the network of fields, pipeline and ports that supply 10 percent of the world’s crude oil. A prolonged outage at Abqaiq, where crude from several of the country’s largest oil fields is processed before being shipped to export terminals, would jolt global energy markets.

“Abqaiq is the heart of the system and they just had a heart attack,” said Roger Diwan, a veteran OPEC watcher at consultant IHS Markit. “We just don’t know the severity.”

Facilities at Abqaiq and the nearby Khurais oil field were attacked at 4 a.m. local time, state-run Saudi Press Agency reported, citing an unidentified interior ministry spokesman. It didn’t give further details and no further updates have been released.

Aramco believes it will be able to restart production fairly quickly, the person said, asking not to be named before an official announcement. Senior Aramco executives are holding an emergency meeting to assess the situation, another person said.

“For the oil market if not global economy, Abqaiq is the single most valuable piece of real estate in planet earth,” Bob McNally, head of Rapid Energy Group in Washington.

Aramco, which pumped about 9.8 MMbpd in August, will be able to keep customers supplied for several weeks by drawing on a global storage network. The Saudis hold millions of barrels in tanks in the kingdom itself, plus in three strategic locations around the world: Rotterdam in the Netherlands, Okinawa in Japan, and Sidi Kerir on the Mediterranean coast of Egypt.

A satellite picture from a NASA near real-time imaging system published early on Saturday showed a huge smoke plume extending more than 50 miles over Abqaiq. Four additional plumes to the south-west appear close to the Ghawar oilfield, the world’s largest. While that fields wasn’t attacked, its crude is sent to Abqaiq and the smoke could indicate flaring. When a facility stops suddenly, excess oil and natural gas is safely burned in large flaring stacks.​

The attacks were carried out with 10 drones and came after intelligence cooperation from people inside Saudi Arabia, rebel-run Saba news agency reported, citing Houthi spokesman Yahya Saree. “Our upcoming operations will expand and would be more painful as long as the Saudi regime continues its aggression and blockade” on Yemen, he said.

Saudi Arabia’s oil fields and pipeline have been the target of attacks over the past year, often using drones mostly claimed by Yemeni rebels. Tensions in the Persian Gulf — pitting Saudi Arabia and its allies, including the United Arab Emirates, against regional foe and energy giant Iran — have highlighted the risk to global oil supply.

Today’s attack is the largest and most sophisticated yet. The Houthi forces have used small and medium-sized unmanned aerial vehicles in various roles, according to a United Nations report. Some are loaded with munitions for use as “kamikaze drones” with a range of up to 1,500 kilometers.

Yemen’s Houthi rebels have been battling a Saudi-led coalition since 2015, when mainly Gulf forces intervened to restore the rule of President Abd Rabbuh Mansur Hadi and his government after the Houthis captured the capital, Sana’a. The conflict has killed thousands of people and caused one of the world’s worst humanitarian crises.

The attacks come as Aramco, officially known as Saudi Arabian Oil Co., is speeding up preparations for an initial public offering. The energy giant have selected banks for the share sale and may list as soon as November, people familiar with the matter have said.

Khurais is the location of Saudi Arabia’s second-biggest oil field, with a production capacity of 1.45 MMbpd. Abqaiq contains an oil-processing center, which handles about two-thirds of the country’s production. Abqaiq is home to the world’s largest oil processing facility and crude oil stabilization plant, and it has a crude oil processing capacity of more than 7 million barrels a day, according to the U.S. Energy Information Administration.

Aramco’s media relations department wasn’t immediately available for comment outside of working hours.


Attacks on Saudi oil risk lowering Aramco IPO valuation

Category : News

By Shaji Mathew, Filipe Pacheco and Sarah Algethami on 9/15/2019

DUBAI (Bloomberg) – As bankers discussed Saudi Aramco’s initial public offering at the Ritz Carlton hotel in Dubai last week, a drone attack was being planned to hit the heart of its operations over the weekend. It caused Saudi Arabia to halve its oil output and may cut the valuation of Aramco’s milestone deal.

The giant oil producer has accelerated preparations for a share sale that could happen as soon as November in Riyadh. Dozens of bankers from Citigroup Inc. to JPMorgan Chase & Co. met last week to work on the deal, with analyst presentations initially scheduled for next week, people familiar with the matter have said.

“Crown Prince Mohammed bin Salman will push the company to demonstrate that it can effectively tackle terrorism or war challenges,” analysts led by Ayham Kamel, head of Middle East and North Africa research at the Eurasia Group, said in a report. “The attacks could complicate Aramco’s IPO plans.”

In an attack blamed by the U.S. on Iran, a swarm of drones laden with explosives set the world’s biggest crude-processing plant ablaze. Floating a minority stake of the oil giant, officially known as Saudi Arabian Oil Co., is part of Prince Mohammed’s efforts to modernize and diversify the economy.

The attacks underscored geopolitical tensions in the region. Iran denied responsibility, which was instead claimed by Iranian-backed Houthi rebels in Yemen.

The main Saudi stock index fell as much as 3.1% shortly after opening on Sunday, leading losses in the Gulf. It partially recovered and was down 1.1% as of 12:48 p.m. local time.

Back in 2017, investors suspected that Saudi government-related funds swooped in to support the market after the imprisonment of local billionaires at the Ritz-Carlton in Riyadh. That also happened amid the international crisis following columnist Jamal Khashoggi’s murder at the Saudi consulate in Istanbul.

Here’s more from analysts and investors:

Eurasia Group

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

Al Dhabi Capital, Mohammed Ali Yasin

“I think this attack may delay the IPO even on the local exchange, and could affect the valuation negatively, as the investors have seen a live demonstration of the risk levels of the future revenues and business of the company. That was very low prior to this weekend attack”

“Aramco has one main source of revenue, oil. That is its strength, but now it is becoming its biggest weakness if it gets disrupted.”

United Securities, Joice Mathew

This “will force investors to go back to the drawing board and re-evaluate their risk models on Aramco”

“Even though this is a rare event, which could be potentially categorized as 4 or 6 sigma levels, the geopolitical risk premium on Aramco’s valuation model would show a sharp increase”

“As far as the pricing is concerned, my view is that there may not be much of an impact if the government is contemplating a 1% listing on the Tadawul. I think the government has the power and ability to influence the decisions of anchor investors there.”

Tellimer, Hasnain Malik

“Ultimately the security risk is not so acute that it outweighs oil price, oil output and free float drivers of the valuation”

This attack “also provides an opportunity for Aramco to demonstrate the redundancy and resilience of its supply chain by minimizing disruption to customers and thereby helping to mitigate the valuation impact of this risk.”

Qamar Energy, Robin Mills

“It will be all but impossible to proceed with the IPO if there are ongoing attacks”

“Valuing Aramco like Shell or ExxonMobil gets us to about $1.2-1.4 trillion. But that would drop significantly if we apply company-specific risk factors.”

Al Ramz Capital, Marwan Shurrab

“I don’t see a substantial hit on valuation.”