The U.S. tried to build its case Monday that Iran was behind the fiery weekend drone attack on key Saudi Arabian oil facilities that raised new war worries and sent energy prices surging worldwide as 5% of the world’s oil supply was stripped from the market.
That's especially worrying for oil-thirsty Asia, where China, Japan, South Korea and India are major customers of Saudi oil, and less so for the United States where oil-producers like Texas, Louisiana, other states and the Gulf of Mexico are producing an abundance of oil and underground petroleum reserve facilities in Louisiana and Texas are well-stocked.
An initial 20% surge in international oil prices on Monday moderated to 15% on talk of the U.S. and other countries tapping strategic reserves to weather any shortfalls. The loss of 5.7 million barrels of Saudi crude processing capacity a day represents half its exports.
Iran-backed Houthi rebels who've been battling Saudi Arabia in Yemen claimed responsibility for the attack on the Saudi Aramco plant, which officials said involved strategically targeted missiles and drones.
President Donald Trump declared Monday it "looks" like Iran was behind the explosive attack on Saudi Arabian oil facilities. But he stressed that military retaliation was not yet on the table in response to the strike against a key U.S. Mideast ally. Earlier he had said the U.S. was "locked and loaded" — and said the oil impact would not be significant on the U.S., which is a net energy exporter.
The Saudi government called the attack an "unprecedented act of aggression and sabotage" but stopped short of directly pinning blame on Iran. Saudi officials said they "will invite U.N. and international experts to view the situation on the ground and to participate in the investigations," adding "the kingdom will take the appropriate measures based on the results of the investigation, to ensure its security and stability."
Trump said he was sending Secretary of State Mike Pompeo to Saudi Arabia "to discuss what they feel" about the attack and an appropriate response.
Iran denied involvement.
The biggest variable for world oil supplies and prices is how long repairs will take and production is reduced — weeks or months — and whether there is a military retaliation or other attacks occur in the troubled region.
“It’s going to depend on the degree and scope of the damage, this is probably not as significant as we thought that it might be,” said David Dismukes, executive director of the Center for Energy Studies at LSU.
In Louisiana, the oil industry has been soft for several years so companies may take advantage of the temporary price spike but not rush to increase production. That would take several months of heightened prices, producers said.
“There are a lot of independent oil and gas producers right now that are having financial difficulties, and they would probably take the excess cash flow to be generated from these higher prices and use them to deleverage their balance sheets, as opposed to putting them toward drilling new wells,” Dismukes said.
In the meantime, there’s a buffer against a big swing in the industry because most countries have at least a 30-day supply of crude oil in storage. The world's richest countries have oil reserves of more than 2 billion barrels.
Trump said Monday that if necessary the U.S. will tap its Strategic Petroleum Reserve, which has upwards of 645 million barrels of oil stored in four underground caverns: West Hackberry and Bayou Choctaw in south Louisiana and Bryan Mound and Big Hill in south Texas.
Still, the Saudi attack made its mark with the 14% spike in oil prices being comparable with the 14.5% spike in oil on Aug. 6, 1990, following Iraq's invasion of Kuwait.
"To take Saudi oil production down 50%, that's shocking," said Jonathan Aronson, a research analyst at Cornerstone Macro.
Jim Burkhard, who heads crude oil research for IHS Markit, said the attack added a "geopolitical premium" back into the price of oil.
Higher oil prices could hurt consumers and the economy by increasing costs throughout the production chain for East Asian countries, said Francis Lun, a Hong Kong-based analyst.
Chris Midgley, global head of analytics for S&P Global Platts, estimates prices could surge into the "high $70" per barrel range. It could go even higher if disruptions are prolonged, but that is not expected, he said in a research note.
Prices may move higher and stay higher because traders would build in a "security premium" against further attacks, said Michael Lynch, president of Strategic Energy & Economic Research.
The situation is better today than it would have been a decade ago, thanks to the U.S. energy boom, but is still troublesome.
Though oil production in the U.S. is booming and its reliance on imports is waning, the U.S. still needs oil from Saudi Arabia because the U.S. imports 2.34 million barrels of oil per day, representing 11% of the petroleum consumed in the country.
The added U.S. oil production is not enough to replace what could potentially be lost if there are further disruptions in the Middle East, and it also is not the type of crude oil everyone wants. Most of the new oil produced in the U.S. is light and sweet, which is low in sulfur. But many oil refineries along the U.S. Gulf Coast are designed to process heavy crude oil.
The U.S. Strategic Petroleum Reserve again could play a role. Of the 645 million barrels stored, 395 million are the "sour" crude, and the remaining 250 million is sweet crude, U.S. government inventory figures show.
As for oil producers, though the price crude oil surged Monday, they are looking at the futures market to make decisions about whether it’s prudent to invest.
“With crude oil price spiking nearly 15%, many projects that were uneconomical yesterday have suddenly become economical,” said Manish Raj, chief financial officer of Velandera Energy Partners, which has an office in Lafayette. “It would take three to six months in order to take advantage of this event; we want to make sure that there’s price stability.”
But oil futures were only trading about 5% higher for June 2021, so that’s not quite high enough for capital investment to be worth it, he said.
For Justiss Oil Co., based in Jena, the company decided to hedge about one-third of its production for the next three months.
“This establishes an effective floor under one-third of our monthly production,” said Jim Justiss, CEO of Justiss Oil.
While oil production businesses may not see much of a boost, oil refineries are likely to see an uptick in profits as will olefins and methanol plants in the petrochemical industry, noted Eric Smith, associate director of the Tulane Energy Institute in New Orleans.
“We could also benefit from the diversion of remaining Saudi heavy oil supplies from China to the U.S. Gulf Coast as part of a rapprochement between China and the United States,” Smith said.
Acadiana Business Today: Taxable sales in Lafayette Parish up 4.7% from last year; Attack on Saudi oil facility strips 5% of world supply from market; U.S. oil boom provides protection
Lafayette Parish's July taxable sales numbers are up 4.7 percent compared to July 2018 and up 7.8 percent compared to 2017.
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