The trade war truce and the appointment of Prince ABS as Energy Minister in Saudi Arabia saw the combined WTI and Brent crude oil net-long jump by 85k lots, the most since August 2018. Later in the week the oil market reversed lower after monthly oil market reports warned about an emerging supply glut due to a continued slowdown in demand growth.
The market was therefore very ill prepared for the events over the weekend with the attacks on the world’s biggest oil processing plant in Khurais and Abqaiq in Saudi Arabia temporarily knocking out 5% of world supply. Following the initial short-covering surge the market has now adopted a wait and see approach while we wait for the answers to several questions.
Most importantly an assessment from Aramco to shed some light on short and potential long term damages. From an oil security perspective the market is also waiting to see how this latest escalation will impact the already fraught relation between Iran and Saudi Arabia.
The U.S. and IEA are both monitoring the situation and stand ready to order the release of Strategic Petroleum Reserves if necessary. A supply driven oil market rally at a time when the world, led by China, Germany and the the US is heading towards an economic slowdown is very bad cocktail. As the price rally so does the risk of recession. While most oil producers ideally would like to see higher oil prices to balance their budgets this is not a sustainable way to achieve it.