Trump approves release of oil reserves if needed after Saudi attack

This satellite image shows smoke rising from Saudi Aramco's Abqaiq oil processing facility in Saudi Arabia

This satellite image shows smoke rising from Saudi Aramco's Abqaiq oil processing facility in Saudi Arabia

Saudi Arabia produces approximately one-tenth of the world's crude oil and it's believed that around half of the country's production, or five million barrels a day, has been disrupted.

In the initial reaction to the news, ICE front-month Brent rallied almost 20 per cent to $71.95 a barrel while Nymex front-month crude futures surged by as much as 15 per cent to $63.34 per barrel.

Brent crude, the global benchmark, settled at $69.02 a barrel, rising $8.80, or 14.6%, its biggest one-day percentage gain since at least 1988. Crude cargo booking activity and freight rates for shipments from the U.S. Gulf Coast rose over the weekend and on Monday, a ship broker said, and regional Gulf crude prices traded over-the-counter were higher in anticipation of bids for more U.S. shipments.

An attack on Saudi Arabia that shut down 5 percent of global crude output caused the biggest surge in oil prices since 1991, after US officials blamed Iran and President Donald Trump said Washington was "locked and loaded" to retaliate. Markets in Japan are closed Monday for a holiday. The benchmark in Indonesia, which heavily depends on oil imports, dropped 1.6 percent.

Diwan says while the amount of oil available on the market may remain plentiful now, the attacks will raise its price.

The attack may add to anxiety about the stability of the world's oil reserves. If the Saudi outage looks like it will be prolonged and oil prices rally significantly, then shale producers will raise output.

"An extreme net outage of a 4 mb/d for more than three months would likely bring prices above $75/bbl to trigger both large shale supply and demand responses".

Aramco CEO Amin Nasser was quoted in the brief statement as saying work was under way to restore production and a progress update would be provided in around 48 hours. Officials said they would use other facilities and existing stocks to supplant the plant's production.

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That's destined to put a floor under oil prices in the interim, Tran warned, with "additional potential attacks" restricting the ability of Saudi Arabia to draw down its reserves to meet the shortfall.

Chris Midgley, global head of analytics for S&P Global Platts, estimates prices could surge into the "high $70" per barrel range.

"I don't think there really is enough to offset what is going to be offline here for a period of time, and you don't even know the quantity of time", said Joe McMonigle, energy analyst at Hedgeye Research.

Still, the situation is better today than it would have been a decade ago, prior to the USA energy boom. But it's still a global market. "If you take oil anywhere out of system it affects everybody", said Burkhard.

"Amid all the calls for de-escalation, Iran has now launched an unprecedented attack on the world's energy supply", Pompeo wrote. "Even the Rapidan Energy Group, a Washington-based advisory group, warned in May that" an effective attack could cause a monthslong disruption of the majority of Saudi manufacturing and nearly all spare generation".

It's that element of uncertainty that can roil markets. The assault probably will heighten tensions farther across the broader Persian Gulf amid a confrontation between the US and Iran over its unraveling atomic deal with world forces.

Important as answers to those questions might be the far more important issue is that the weaponisation of hard-to-detect miniature drones falls into the worst-nightmare category for the oil and gas industry, especially at facilities in contested regions, which is much of the Middle East.

US Secretary of State Mike Pompeo on Saturday blamed Iran for the attacks.

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