(Bloomberg) – Five dollars? Really?
A mysterious attack took almost six million a day from Saudi Arabia's oil supply, and almost a week later we see an increase of less than the price of a beer. That means the market worked. Prices skyrocketed immediately afterwards, and then the words of relief from Saudi Arabia calmed everyone, to the point of reminding them how bleak the oil landscape looks in 2020. Then, prices fell again, although not quite . After all, explosions are worrisome things; in this case, more worrisome than what prices indicate.
Caught between the commercial war and the flashes of a real war, oil seems more concerned with the first. The Saudi Arabian press conference on Tuesday was in fact more ambiguous about the country's production status than the oil pullback indicates. However, it was enough for a rather bearish market.
The most obvious risk that persists is retaliation. Both Saudi Arabia and the US Iran is blamed for the attacks, and the risk of a counterattack and greater escalation is more gray than black at the moment. The less obvious risk is related to insurance.
The oil market depends a lot on insurance, but insurance only works if you can count on them. And two of the most important oil policies now seem more ambiguous.
One is the surplus production capacity of Saudi Arabia. The market treats it as oil inventories, but better, because for practical purposes it is inexhaustible. The 2.3 million barrels per day of surplus capacity in Saudi Arabia account for two-thirds of the world's support (and most of the rest is in the neighboring Gulf states). Although the vulnerabilities of an installation as critical as Abqaiq have been stipulated for years, few really expected a direct attack of this magnitude. Even under estimates (probably optimistic) of Saudi Arabia, this previously considered untouchable capacity will not be fully available until the end of November.
The other is a kind of reinsurance policy that supports this excess capacity: the US security guarantees. Since the rapid accusation of the Secretary of State, Mike Pompeo, against Iran and the tweet in which President Donald Trump claimed to be prepared for a response, the White House has taken a more erratic stance, moving from threats to calls to the diplomacy. Trump has also emphasized that although he supports Saudi Arabia, the oil supply itself makes for the US. less dependent on the region.
This may reflect a simple political convenience, since a US participation. in a Middle East conflict that raises oil prices would be a disastrous backdrop for Trump's re-election campaign.
However, it is surprising that Washington has been contained, despite the apparent certainty about Iran's role in the most sacred attack on oil. In addition, it is not possible to ignore evasion, given the context of the new US transactional approach. of alliances and guarantees in what used to appear to be fixed points on the geopolitical map.
Other oil insurance market policies remain. One of them is the futures market, although lately there has been a notable withdrawal of speculative money, crushed by the unexpected and close to succumbing to a general apathy towards energy.
There are also physical stocks such as the Strategic Petroleum Reserve and almost 3,000 million barrels of commercial inventory in OECD countries. Although it is not so clear, China could have between 820 million and 940 million barrels in strategic and commercial stocks, estimates Michael Meidan of the Oxford Institute for Energy Studies.
Even so, stocks are also an imperfect insurance policy. Mechanisms such as collective releases designed by the International Energy Agency have been rarely used, even when prices have skyrocketed to levels that threaten the economy. Trump's tweets about the Strategic Reserve last week suggest there is no coordination with other IEA members. Faced with a real problem, there is a stronger impulse to monopolize than to distribute for the common good.
The unifying theme here is, interestingly, fragmentation. As Sarah Ladislaw and Nikos Tsafos of the Center for Strategic and International Studies wrote in a report published the day before the attacks:
For several decades, energy security has been defined and pursued in the multilateral world through relatively open markets and technology transfer, where energy relations have become a raw material. But that world could disappear soon: energy relations are becoming more political, open trade can open the way to friction and the great powers could use energy relations or energy technology to gain an advantage over others.
The rise of oil to energy pre-eminence in the postwar period has been a testament to globalization, backed largely by the muscular commitment of the United States to free markets. Oil became omnipresent not only because it is useful, but because we consider it effectively omnipresent.
The dominance of energy, like commercial warfare, is a radical departure from the world we have known, so the free flow of molecules cannot necessarily be taken for granted. One of the biggest energy developments of the last two decades is the increasing globalization of regional natural gas markets, making them more like oil. But we may be entering a period in which oil recedes to meet gas in its less integrated field.
We are not there yet. But the vital importance of energy means that the national interest is quickly affirmed if trust in security of supply deteriorates. A more disarticulated energy market is a more dynamic energy market, which in turn pushes importers to seek alternatives for strategic reasons, in addition to existing climate concerns. The week that began with explosions in the heart of oil, after all, ends with massive protests against him around the world. Those explosions in Saudi Arabia did not change the world; rather, they illuminated what is already changing.
Original Note: Saudi Attacks Haven’t Spooked Oil Enough: Liam Denning
To contact the editor responsible for the translation of this note: Carlos Manuel Rodriguez, [email protected]
Reporter in the original note: Liam Denning in New York, [email protected]
Editor responsible for the original note: Mark Gongloff, [email protected]
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