Oil Market Turmoil – Good or Bad News for Consumers?

The coronavirus crisis has affected all aspects of economic life but its impact on the oil and gas markets has been especially dramatic.  The oil market was already on the verge of over supply before the crisis struck. Producing countries were struggling to agree production cuts even before the scale of the global economic downturn became apparent so a demand reduction of around 35% could barely have come at a more inconvenient time.


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A Word on the Saudi Oil Installation Attack

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.

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Important Note on the Yellowhammer Report

Yellowhammer – Is there really a risk of energy price increases, or is this bird a red herring?

There have been some alarming reports in the media today about the risk of significant increases in electricity prices supposedly highlighted in the government’s Yellowhammer report on no deal Brexit impacts.  I believe these are the result of misunderstanding the relevant text (below).

  1. Demand for energy will be met and there will be no disruption to electricity or gas interconnectors. In NI there will be not be immediate disruption to electricity supply on Day 1. A rapid SEM [Single Electricity Market] split could occur months or years after EU Exit. In this event, there would not be security of supply issues. However, there will likely be significant electricity price increases for consumers (business and domestic), with associated wider economic and political impacts. Some participants could exit the market, thereby exacerbating the economic and political impacts. (BEIS)

The document refers to the risk of ‘significant increases in electricity prices’ in Northern Ireland specifically, and then only in the event of a rapid split in the all-Ireland Single Electricity Market – something both the UK and Irish governments are intent on avoiding.  There would be NO material effect on the GB electricity market either way.

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