Drone Attacks on Saudi Arabian Oil Infrastructure Increases Prices

Market TalkMonday, Sep 16 2019
Quiet Start To End A Wild Week

When news broke Saturday of coordinated drone attacks on Saudi Arabian oil infrastructure that shuttered nearly half of the country’s production, the question wasn’t if prices would move higher, it was whether or not the increases would be record-breaking.

Brent crude led the initial surge when trading resumed Sunday night, trading up nearly $12/barrel in the early moments, a 19.5% increase – marking the largest single day rally in the history of that contract. RBOB and ULSD futures saw similar price spikes in the opening seconds of overnight trading as trading algorithms raced humans to buy, with both contracts briefly trading up more than 20 cents before cutting those gains in half later in the evening.

Prices have rallied again off their evening lows after the US accused Iran of launching both missiles and drones in Saturday’s attack, a new revelation that combined with strong words from the president suggests a US response may become inevitable.

There are many more questions that need to be answered before we’ll see where prices will end up. Perhaps the 2 most important this week are how quickly the Saudi’s can bring production online – this is where their previous production cuts may prove valuable as it could provide a cushion, depending on the logistics puzzle of returning those barrels to the market – and what the response will be both from the Saudi’s and the US.

From a technical perspective, the May highs around $73 for Brent and $64 for WTI look to be the natural resistance layers after the early overnight rally stalled out in that vicinity. If Saudi output can’t come back online, or if a shooting war with Iran breaks out, those resistance levels may prove to be only a speed bump. At this point however, the global overhang of supply is acting as a buffer. Just think of what an attack like this would have done 5 years ago when prices were still north of $100/barrel.

Some hedge funds are likely patting themselves on the backs this morning as the money-manager category saw healthy increases in the net-long positions held in energy contracts last week – prior to the Saudi story making most other energy news temporarily irrelevant.

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Chicago basis values rallied Tuesday after reports that Exxon had shut down the 250mb/day Joliet refinery following severe storms that knocked out power to the area Sunday. RBOB differentials surged nearly 9 cents on the day, while diesel diffs jumped more than a nickel. With 3 large refineries in close proximity, the Chicago cash market is notoriously volatile if any of those facilities has an upset. Back in May there was a one-day spike in gasoline basis of more than 50 cents/gallon after Joliet had an operating upset so don’t be surprised if there are bigger swings this week if the facility doesn’t come back online quickly.

Moving in the opposite direction, California basis values are heading the opposite direction with the transition to August scheduling pressuring CARBOB differentials in LA and San Francisco to their biggest discounts to prompt RBOB futures in more than 18 months. Gasoline imports into PADD 5 have held well above average levels over the past 2 months, which has more than offset the loss of the P66 Rodeo refinery’s output after it completed its conversion to RD production, in another sign of how growing refining capacity in China and other Asian countries may become more influential to the US. California regulators may also pat themselves on the back that their new plans to force refineries to report their gross profit monthly, in addition to the rules requiring all bulk trades in the state be reported must be driving the lower gasoline differentials, assuming they figure out what a basis differential is.

Meanwhile, California’s Carbon Allowance values have tumbled to their lowest levels in a year after a CARB presentation last week suggested the agency would be delaying long-anticipated tightening of the Cap and Trade program until 2026.

Click here to download a PDF of today's TACenergy Market Talk.

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ULSD futures are leading the early move lower, trading down a nickel on the day, and marking a 19 cent drop since July 4th. There’s not much in the way of technical support for ULSD, so don’t be surprised if this sell-off continues to pick up steam.

With today’s slide, RBOB futures are down 17 cents from where they were trading on July 4th, and are just a couple of cents from testing their 200-day moving average. Should that support break, it looks like there’s a good chance to test the June lows around $2.29.

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The EIA highlighted the energy trade between the US and Mexico in a report Monday, showing that despite so many claims of energy independence from Mexican officials, the actual amount of refined fuels and natural gas bought from the US continues to increase. That’s good news for many US refiners who have become more dependent on Mexican purchases to find a home for their output.

Click here to download a PDF of today's TACenergy Market Talk.