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Saudi Oil Production Under Attack, Expect Reprisals

Emblem of Saudi Arabia

Media came alive today over the Saturday attacks against Saudi Arabia’s oil production infrastructure that knocked out around 5.7 million barrels per day (bpd) of Saudi oil production, more than half of its output, which equates to 5% of global oil production.

The Iranian-backed Houthi group in Yemen claimed responsibility for attacks, according to a statement from state-run oil major Saudi Aramco.

Markets will resume trading Sunday night and Monday morning and will likely follow a knee-jerk trajectory. How high oil prices will climb depends on how quickly Saudi Arabia restores lost production as well as the geopolitical fallout between Saudi Arabia and the Yemen rebels. Escalation of hostilities, even after Saudi production is restored, will likely keep upward pressure on oil prices in the short term.

The most recent clash between the two sides comes as oil prices have been trading in the low $60s range for global oil benchmark Brent crude and the mid-$50s range for US oil benchmark NYMEX-traded West Texas Intermediate (WTI) crude futures.

Global oil markets have been spooked for most of the year from weakening global economic growth amid ongoing trade tensions between the US and China that has tempered demand; this weakness will persist going forward. What markets need most is not only the end of Iranian threats to oil shipping in the Strait of Hormuz, as well as the cease of oil production threats and disruptions in Saudi Arabia, but the end of trade hostilities between Washington and Beijing – all developments that will take considerable time to remedy.

In the short term, President Trump will likely order the release of oil from the country’s strategic petroleum reserves to not only help fill shortages left by the disruption to Saudi production, but to also offer the market a much-needed sense of safety or at least intervention while this all plays out.

Russia, for its part, the world’s second largest oil producer after the US, will benefit from this “temporary” oil market disturbance. Russia, which receives a disturbingly large part of its national revenue from oil and gas production, needs the extra Petro-dollars amid ongoing weak oil prices and the lingering and harmful impact of US sanctions against its energy sector due to a number of factors, including its invasion of neighboring Ukraine in 2014.

The Saudis, whether they like it or not, are once again at the forefront of global oil market high-drama. The kingdom, which has pledged repeatedly to reduce its reliance of oil revenue, will have to formulate a strong response on all fronts.

Not only will Riyadh strike back against Yemen and possible other Iranian-backed interests in the region, but it will be seeking support, either diplomatically if not outright, from Washington.

Finally, there seems to be no end game this time from the US. Trump, if he has an end game, would simply like to keep driving Iran to its economic knees from sanctions and either force regime change or drive Tehran to the bargaining table. The Iranians however, though bloodied, are proving more resilient than the president likely bargained for. Riyadh apparently doesn’t have an end game in its Saudi Crown Prince Mohammed bin-Salman orchestrated fight against Yemen. All the Saudis can do is push ahead.

Oil markets will recover but expect wild oil price spikes in the coming days and weeks ahead. 

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