The Aftermath of the Saudi Oil Attacks Is Volatile
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The Aftermath of the Saudi Oil Attacks Is Volatile

by | published September 18th, 2019

According to my original plan, this edition of Oil & Energy Investor was supposed to begin outlining how my recent Persian Gulf meetings would impact your approach to energy investment.

Well, nobody bothered to tell other actors.

At 2:10 AM local time, September 14, Emirates flight 213 carrying Marina and I took off from Dubai International Airport.

Shortly after, at least twenty drones and nine cruise missiles hit both the huge Abqaiq complex and the Khurais oil field in Saudi Arabia.

After more than fifteen hours, our direct flight landed in Fort Lauderdale. We made it through passport control quickly (thanks to Global Entry) and turned on our cell phones.

It was immediately obvious that something had happened.

Because it was mid-morning on a Saturday, and I had a virtual tidal wave of calls and emails. And most of them were from the region we had just left.

For the next several hours, conference calls took place and intel was exchanged with colleagues in several Persian Gulf and European locations.

There was little interest in assessing blame for the attack; there would be quite enough of that coming out of Washington, Riyadh, Teheran, as well as the global press. We needed to get a handle on what this meant for the oil market and energy sector investment targets.

Now, the reaction to the attacks was immediate…

Making Oil History

First, the day after the attacks, crude oil prices spiked more than on any single day in the history of futures contract trading.

However, the pullback was inevitable. Absent another threat, the prices were bound to recede.

Even so, as I write this, WTI and Brent remain up almost 7% since before the attacks. Brent, as the primary global crude oil benchmark against which more daily trade in the international market is processed than WTI, which has become more of a U.S./North American-market yardstick.

The initial estimate that must be made involves how much Saudi crude can return to the market and how long it will take to get it there. Yesterday, Saudi Oil Minister Abdulaziz bin Salman pledged to return lost production by the end of September.

That has reassured the market, at least in the short term. But it has already created additional concern among my network of regional contacts.

Given the Saudi Aramco decision essentially to invoke force majeure and delay shipments of crude to China on already operating contracts, the major question emerging is the actual source of the volume pledge made by the minister.

Let’s assume for the moment that the six million or so barrels per day can be restored quickly. Several of my sources are indicating that a portion of that volume is not actually coming from crude processed at Abqaiq, but rather from the nation’s strategic reserves.

Those reserves have about 30 days or so of volume. Of course, any drawdown from reserves must itself be replaced, or the knock-on impact to crude prices will kick in again.

The important point from all of this, however, is the almost universal conclusion among my network:

The extensive damage at Abqaiq cannot be repaired in such a short period of time.

The Saudi Vulnerability – And Frustration

Second, I had predicted this sort of attack several years ago in a classified report I authored.

While a major point of vulnerability, Abqaiq is not the only problem in the Saudi oil infrastructure. In addition, the single most vital Abqaiq component from the standpoint of maintaining Saudi economic (and budgetary) integrity was assiduously avoided in the attack.

This involves the desulfurization facilities essential to prevent sour Saudi crude at significant (and revenue busting) discount.

That is a clear signal that matters can deteriorate even further should subsequent attacks take place. I provided a vetted version of that security report to my Energy Inner Circle readers in this week’s edition of Dark Files, The Saudi Vulnerability (Click here to read it).

Third, for the second time, the Trump Administration has pulled back from authorizing any surgical or proportionate military response. Instead, a new series of sanctions against Iran were announced this morning.

This has resulted in additional frustration among my Saudi and Emirati sources.

Most of them have concluded the region needs to attend to its own affairs, since Washington is, as one contact put it to me early this morning, “incapable of deciding how seriously it will respond or even if it is an issue of vital American interest. The drones effectively ended it as a tweetable situation.”

Meanwhile, the threat level increases.

Waiting on Tenterhooks for News

U.S. Secretary of State Mike Pompeo is on his way to Riyadh, and the Saudi Defense Ministry has announced they will provide evidence of Iranian complicity in the attacks.

For its part, Teheran has flatly rejected any involvement in the attacks and has declared that any reprisals will be immediately met by Iranian force against U.S. and allied assets in the Persian Gulf region.

Fourth, the deadlock in its own elections has effectively curtailed additional Israeli responses.

The Israeli Air Force had attacked two sites inside Iraq recently after concluding they were serving as missile launching locations. Additional responses from Israel will increase the regional volatility significantly.

Finally, this is playing out as Riyadh once again attempts to fast track the IPO of a minority stake in national oil giant Aramco (more on that another day). While the placement offer will allow for major diversification of the Saudi economy and investment environment, the essential revenue value of the move remains centered on the market’s perception of what Aramco assets are actually worth.

That translates into the value of oil reserves, and these days more importantly, the ability to bring those reserves to market. Drones and cruise missiles in one fell swoop brings all of this into question.

One aside here. The group of major global private investors and players I advise is considering a calling another meeting in short order. In that event, I will of course bring you along again… wherever this ends up being held.

Sincerely,

Kent

P.S. It’s clear following the Saudi Arabian attacks that the Persian Gulf region is a hotbed for risk. As the world watches and waits for the next decision, the U.S. is looking at itself. See, the risk in the Middle East is less of a problem for us, as we’re the next economy up to bat if the region can’t sort out its issues. In fact, in one remote section of the Chihuahua Desert, USGS scientists uncovered something that adds to U.S. supremacy in the oil business. It has no less than 20 billion barrels worth of oil – and that’s just the tip of the iceberg. There’s a potential of $1.4 trillion up for grabs. Better yet, according to the CEO of one of the largest energy exploration firms in the world, much of the oil in this region will only cost $2.25 per barrel to extract. The right move could hand early investors a mind-blowing windfall – enough to potentially transform a small stake into a life-changing fortune. Click here to learn all about it.

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