What surprises me about the attack on the Saudi oil installation is that with all of the technology available to the Saudis, particularly from the US, a single drone was able to cause so much damage. The Houtis have claimed responsibility although that doesn’t actually mean that they did it. Anyone that wants to can take the credit. The Houtis are supported by Iran, but that doesn’t mean that their actions are necessarily controlled by Iran.
The market responded initially to the risk but then relaxed. There is too much oil in the market anyway. Saudi and Russia will need to cut back if they feel the need to “balance” the market, but neither wants to do that. So, perhaps, the incident has done them a favour? The US is always quick to blame Iran, but I cannot actually see how Iran benefits. Countries that depend on imported oil to sustain their economies are most at risk, like China and India. In my view, the incident highlights the world’s dependence on oil and even though it will supposedly be phased out one day, looking ahead over the next twenty years or so, all forecasts illustrate that it will still have a strong future even though this may be regarded today as short-term.
The Saudi Aramco float is now under scrutiny with many saying it will need to be pulled. However, as I have said, the incident makes us realise how dependent we are on oil and, therefore, why not go ahead with the float? Asia and the US responded more dramatically than Europe, and as the price has since fallen back, perhaps the risk is not being seen as quite so dramatic as it has been reported. With geo-political tension mounting and no sign of the US-China trade war being settled, the oil price is under pressure here but more so from the threat of a slowdown and drop off in demand.
The US is virtually self-sufficient in terms of crude oil, but diesel exports and gasoline imports between Europe and here could be vulnerable. The US does have strategic reserves, which could be called upon. Markets respond to current situations, although in reality, stocks are purchased some time in advance, but as the US “driving season” ended last week on Labor Day, any impact will be less serious. What we don’t know is how the US administration will respond. Thankfully, John Bolton has gone, although the legacy may hang around for a while. Pompeo has said that the US is ready to strike Iran and Trump is ready to go, but where is the evidence? Physical conflict between the US and any country in the Middle East will escalate further. Restraint is called for before the US moves into another conflict zone on behalf of another country. Since the Khashoggi murder, the relationship has cooled off somewhat and therefore rushing to the Saudis defence may not be quite so popular as before.
No one knows how much damage the Saudi infrastructure has suffered or how long before it will be brought back fully on stream, although a recent report, unsubstantiated, has implied that output is already close back to full. Furthermore, can we trust the information that the news media are being given? Bad news is good news for the oil price! Let’s see what develops over the next few days and let the oil price mirror sentiment.