Trump/China relations finally took a back seat in oil market headlines this week. All it took was a massive drone strike knocking out about half of Saudi Arabia’s oil production creating the largest intraday crude jump ever.
In case you missed it, Iran-backed Yemeni rebels (important: Iran was widely believed to be involved but this is still unsubstantiated) attacked one of Saudi Arabia’s largest facilities- the Abqaiq- over the weekend and have taken out an estimated 5.7m bpd of production.
Price action was obviously haywire on Sunday night open and into mid-week trading. After closing last Friday near $60, Brent crude printed up to $71.95 on the open before settling down towards $68 in late Monday trading and falling to $64 on Tuesday. For now, traders seem to be working to answer two questions about the attack to figure out where prices are going. First, how long will the outage last? Second, will the attacks lead to a broader escalation of conflict in the Middle East?
On the first question, we think a reasonable way to measure the duration of the supply outage is to look at Brent spreads which we view as the expression of gathered intelligence from the world’s most informed physical oil traders. In the front of the curve, the prompt 1-month Brent spread is trading at 96-cents backwardated, suggesting that the outage will certainly last at least a few weeks. The 2month/3month spread is trading at 85-cents backwardated, the 3month/4month…