48 hours ago, the million-dollar question for hedge funds was when the Saudis would be able to bring production back up to full capacity after the multiple, surgical strikes on Aramco facilities Saturday. Supply has now been largely restored, and the damage has been clarified after much panic.
The worst strikes in terms of visible damage based on satellite imagery were the processing facilities at Abqaiq (image 1), with the lower far-left infrastructure being the hardest hit, and to a lesser extent, the Khurais oilfield, which is 180KM southwest of Abqaiq (image 2):
Abqaiq is the key here.
Lack of clarification wreaked havoc on the market for a couple of days, with the Saudis downgrading an initial estimate that they would be able to get significant capacity back online in a matter of days. On Monday, that estimate was changed to a vague range of weeks or months as officials continued to assess the damage and necessary repairs.
On Monday, we advised private clients that there is enough Saudi domestic storage to last just shy of a month, and that the rest would be made up from bringing idle fields back online, while in the end, the effect on the market in terms of supply and demand would be less dramatic than the initial jump in oil prices warranted.
By Tuesday, the markets had largely forgotten about the attack from a technical standpoint. Oil prices pared gains, and the market shifted its focus back to the Fed. The Saudi energy ministry said it would return to normal production levels by the end of this month.
On the wider geopolitical front:
From an investor’s point of view, and from a realistic point of view, evidence of culpability, in this case, will not matter. What matters is who is in control of Trump’s next move, and how the Saudi Crown Prince will respond.
In the lead-up to this we attack saw Trump fire Bolton as National Security Advisor, which signaled to external actors that the US administration was about to let up on the pressure on Iran - a situation that does not suit the Israelis or the hardline hawks in Washington, along with private pressure groups obsessed with protecting the ‘holy land’.
The stage was also set by the UAE’s announcement of a withdrawal from the expensive and unwinnable conflict in Yemen, where in a coalition with the Saudis, it was fighting a proxy war with Iran against Iranian-supported (but not fully controlled) Houthis. When the UAE pulled out and launched a second front in this war between Yemeni separatists in the south and the Saudi-backed government of Yemen, it also signaled a victory of sorts for Iran.
These two developments would be unacceptable to forces keen on intensifying the conflict with Iran.
As we have noted previously, Trump is not interested in war with Iran. He is now backed into a corner given the 2020 election campaign, and hawks within his own party are coming down heavily on him for not pushing the war button immediately. In an attempt to save face on this, Trump vaguely tweeted on Wednesday morning that he has “instructed the Secretary of the Treasury to substantially increase Sanctions on the country of Iran”.
Indications are that he is buying time: While he has said the US is “locked and loaded”, he has also said that he is waiting for a full Saudi investigation to determine culpability.
But other forces are at work here, as well: Pompeo waited for no evidence and immediately blamed Iran, and unnamed ‘intelligence’ sources are now ensuring that the media is widely publishing news of classified intel that proves that the missiles and drones employed in the attack were not only of Iranian origin but were fired from Iran.
The Saudis haven’t taken the bait yet. Instead, they have called on the world’s governments to confront the attacks “regardless of their origin”. So far, the Saudis have refrained from directly accusing Iran, but rumblings from the Kingdom suggest the possibility. The fact that the Saudi air defense systems failed to detect this massive launch is now being eyed by Russia as a major potential payday. Later today, the Saudis are expected to hold a press conference that will discuss the ongoing investigation into the attack, during which time it is widely anticipated that they will focus on Iran, which could set in motion a dangerous war dance, as Trump has suggested that the US is simply waiting for the Saudis to dictate what happens next.
On the Aramco IPO front:
On one hand, there are plenty in the Kingdom who would suggest delaying the IPO because investor sentiment may now see this as a higher-risk endeavor given Aramco’s clear vulnerability to attack.
However, this is MBS’ pet project that he has demanded must go through despite earlier reservations from his key advisors who questioned the valuation. If he were to delay the IPO now, it would mean losing face on a project that in the past he has refused to budge on. He will also note that Aramco’s valuation is tied to the price of oil, which means that technically, it’s is now worth more.
As of the time of writing, the underwriters for the IPO had been given no orders to delay, and the listing was to take place this week domestically. For the IPO, it matters less how quickly repairs are completed and full capacity online than it matters how vulnerable investors think Aramco is. If MBS were to take the bait of alleged intel showing Iran was behind the attack and respond in kind, this would further jeopardize the IPO.
There are quite a few beneficiaries from the Aramco attacks, and just as many would-be beneficiaries circling this battlefield for fallout:
- Israeli prime minister Benjamin Netanyahu faced a re-do vote yesterday, and this should also be viewed within the prism of the Saudi oil attack. Netanyahu’s fate lies squarely in convincing a reticent Israeli public that he is the only figure who can protect them from Iran. That also means ensuring that Iran is viewed as a major threat. He is a direct beneficiary of the Saturday attacks on Aramco facilities. The Tuesday re-vote was the fallout from elections in April in which Netanyahu’s right-wing bloc won but failed to secure a majority in the Knesset and then failed to form a coalition government. Netanyahu then triggered fresh elections in a highly criticized move. At stake, his ability to form a coalition government the second time around. As of the time of writing on Wednesday morning, the situation for Netanyahu was not ideal: Exit polls with 90% of the vote counted showed Netanyahu’s Likud party in a dead heat with the centrist secular Blue and White faction led by Benny Gantz. The game now is to win over small parties to put one or the other over the edge. The kingmaker, then, could be Israeli President Reuven Rivlin, who ended up siding with Netanyahu in April.
- Putin wasted no time in offering a lucrative sale of weapons to Saudi Arabia to help protect its oil infrastructure. In his aggressive and tongue-in-cheek marketing pitch, Putin noted that Moscow is “ready to provide respective assistance to Saudi Arabia, and it would be enough for the political leadership of Saudi Arabia to make a wise government decision - as the leaders of Iran did in their time by purchasing S-300 and as President Erdogan did by purchasing the latest S-400 ‘Triumph’ air defense systems from Russia.” Putin made this statement sitting next to the Iranian foreign minister, who laughed. The point Putin is making is this: In the end, we’ll all be defended against each other by advanced Russian air defense systems, and Russia will own this playing field thanks to the tit-for-tat over Iran.
- US crude export demand has surged following the attacks on Saudi oil infrastructure that saw 5.7 million bpd taken out of the global oil supply mix. US crude oil exports had already surpassed the 3.0 million bpd level, and now traders are estimating that US exports could reach 4.0 million bpd. But those barrels are unlikely to be nearly as economical for Asian buyers, who have to contend with increased shipping rates as well, with VLCC rates increasing by as much as $1 million per load, and Aframax rates increasing by almost $2 per metric ton. The latest, given the Saudi assurances that production will be back online by the end of the month, is that the US will not move to dip into strategic reserves to stem an oil price increase.
- Kuwait is on high alert in the wake of the Saudi oil infrastructure attacks. Kuwait has spotted unmanned planes over the capital city. Kuwait’s armed forces meeting on Tuesday included a presentation of all possible scenarios that could come from the incident.
Global Oil & Gas Playbook
- This week, even more discoveries lining up offshore Guyana: Exxon/Hess has announced another discovery - the 14th so far - with the Tripletail-1 well in the Turbot area. This discovery comes as Exxon prepares to launch first production from its Liza project in early 2020. In the same basin, Tullow has also announced another discovery in the Orinduik block, with the Joe-1 wells. The first discovery came in August with Jethro-1. Joe-1 encountered 14 meters of net oil pay in high-quality oil-bearing sandstone reservoirs. Tullow’s non-operated Carapa-1 well in the Kanuku license is also expected to see drilling start this month.
- US oil explorer Vaalco said it could quadruple its size through acquisition. This news comes as Vaalco plans to list in London. The company produces 3,664 barrels of oil per day from an oil field in Gabon, West Africa.
- Energy Transfer LP is planning to buy smaller rival SemGroup Corp in a unit and cash transaction valued at approximately $5.1 billion and expected to close late this year or early 2020. Energy Transfer will gain control of SemGroup's crude oil terminal on the Houston Ship Channel, as a tie-in to its Nederland, Texas, terminal. The company also announced plans to build a 75-mile oil pipeline between the two terminals.
- The Argentine government will offer companies and oil-producing provinces a subsidy to compensate for imposing a fuel price freeze last month. The subsidy of roughly $2 will be applied to each barrel of oil delivered to the market in September. Last month, President Macri imposed a three-month freeze on motor fuel and crude prices through an emergency decree following a sharp depreciation of the local currency.
- The National Iranian Oil Company has signed a $440-million contract with domestic company Petropars to develop the Belal Gas Field in the Persian Gulf. Under the deal, Petropars is to produce 500 million cubic feet per day of gas from the Belal, which is shared with Qatar.
- Eco Atlantic announced a discovery on the Orinduik Block, offshore Guyana. It marks the second discovery in two wells for Eco and its partner Tullow which have so far seen the kind of consistency that Exxon has enjoyed nearby
- Eni has started production of 100 million cubic feet of gas a day from the Baltim South West gas field offshore Egypt, discovered in 2016. The development program foresees the drilling of five more wells to achieve a production target of 500 MMscf/d by 2Q 2020.
- Shell Petroleum Development Company of Nigeria has declared force majeure on exports of Bonny Light crude oil due to the closure on the Nembe Creek Trunk Line (NCTL). The pipeline, which conveys between 100,000 and 150,000 barrels of oil per day, was shut down last week by operator Aiteo. In April, NCTL was put under force majeure due to a fire outbreak, which reopened in May.
- Dutch-based maritime company Boskalis has signed a deal with Iraq’s oil ministry to construct a new export terminal in the country, south of the Abot tanker terminal in the Persian Gulf. According to the Iraqi Oil Ministry, the installation will boost export capacity by 3 million barrels per day (bpd) of crude oil and storage capacity by 6 million bpd.
- Norway’s Equinor has started production at the Utgard gas and condensate field in the North Sea along the Norwegian-U.K. border, with estimated daily production 43,000 barrels of oil equivalent. The field’s recoverable resources are estimated at about 40 million barrels of oil equivalent. Poland’s Lotos and Kuwait’s KUFPEC are the partners in the project.