Why drone attacks on Saudi Aramco haven’t sparked sustained oil price spike

The Oilholic returned from researching enhanced oil recovery in rural Pennsylvania on Friday (September 13), only to wake up to a tumultuous weekend, and week, for the oil market in that order. For in the small hours of Saturday morning, multiple drone and alleged missile attacks, claimed by Houthi rebels, hit Saudi Aramco’s crude processing facilities in Abqaiq and the Khurais oilfield. 

The attack took out 5.7 million barrels per day (bpd) of Saudi production capacity. Going by the last Platts survey, the Kingdom pumped 9.77 million bpd in August, implying the attack created a 58% drop in production at the very least when measured against last month's production levels.

The situation remains unpredictable, and as yours truly told the BBC – were it not for US production serving as a buffer, current oil pricing scenario and modelling would be very different.

The Americans remain the world's largest oil producer pumping in excess of 12 million bpd, and the country’s production could rise to 13.4 million bpd at some point in 2020. That is what has largely kept the market sane. Predictably, Brent futures shot up 20% to $71 per barrel at the Asian open on Monday but the uptick did not last. As the week’s trading came to a close on Friday (September 20), a look at benchmark prices - ironing out the week’s volatility - says it all. Brent closed at $64.28 per barrel, up $4.06 or 6.84% while the WTI closed at $58.09 per barrel, up $3.24 or 5.9% on the week.

The said movement is hardly the stuff of bullish dreams; even if the week belonged to the longs, short-sellers did not take as big a hammering as some feared. And consumers need not be overly concerned for now at least. As the Oilholic said on ITN/Channel 5 News, the physical crude market’s response and its domino effect on fuel prices depend not on the here and now, but on where from here? Lot depends on the Saudi and US response to the attack that both parties near instantaneously blamed on Iran which backs the Houthi rebels.

If the Saudis, in concert with the Americans, hit sites in Iran, then that could lead to a wider conflict in the Persian Gulf and some very real turmoil associated with it; not just knee-jerk price reactions of the sort we saw in the immediate aftermath of the revolt.

It is here that the market could see a sustained geopolitical risk driven uptick in oil prices for $10 to $15 per barrel. Plausibly, you will see prices at the pump rising given that retailers pass an oil price rise near instantaneously but are pretty slow in cutting them in the event of a price drop. And of course governments who in many cases take two-thirds of the price we pay per litre at the pump, might have some serious thinking to do as well.

For now an eerie calm prevails, with the market soaking in verbal salvos between Riyadh, Washington and Tehran. Logical conclusion is that an attack of this magnitude cannot go unanswered or Saudi Crown Prince Mohammed bin Salman, the power hungry favourite son of Saudi King Salman, would look weak. Finally, here are the Oilholic’s thoughts in detail on Forbes summing up the turbulent trading week. That’s all for the moment folks! Keep reading, keep it 'crude'! 

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© Gaurav Sharma 2019. Photo 1: Gaurav Sharma on BBC News at Six on September 15, 2019 © BBC, Photo 2: Gaurav Sharma on 5 News on September 16, 2019 © ITN

Enhanced gas recovery & the good folks at DGOC

The Oilholic just got back from a quick turnaround research trip to the US Appalachian Basin covering the hydrocarbon rich prospection patch between Morgantown, West Virginia and Pittsburgh, Pennsylvania.

The latter being that promised American departure point yours truly told you about in 2016, where even the airport authority is privy to the proceeds natural gas! 

Having spent the last six months being convinced by academics and policy wonks that the Appalachian Basin is in trouble given oversupply, pipeline capacity issues, and the prospect of sub-$2/MMBtu Henry Hub prices, it was a breath of fresh air listening to the good folks at Diversified Gas and Oil Plc (LON:DGOC).

The company is currently listed on AIM, has formally announced its intention to move to London's main market and says that business is good. DGOC's simple, effective modus operandi is going after mature long life conventional wells in the region, often neglected by exploration and production firms obsessed with unconventional shale exploration.

The company's CEO Rusty Hutson (fifth from left), COO Brad Gray (second from left) and their team on the ground in Pennsylvania took this blogger around their patch explaining their methods, which include deploying a surprisingly low amount of contractors on site, entrusting employees to chart cost effective, efficient and resource maximising pathways, and of course some prudent management.

Hutson and Gray are also pretty acquisitive almost, always fishing around for primarily natural gas assets they can buy, often at low cost, to turn them around. To give the readers a flavour, recent sellers to DGOC have included the likes of EQT, CNX and Anadarko.

By drilling few wells, and mainly operating and maximising already onstream wells totalling over 60,000, team DGOC believe they can make a decent margin even at $2/MMbtu Henry Hub prices with smart strategic hedging, including hedges stretching 10 years out in the case of some instruments they have deployed.

If enhanced hydrocarbon recovery will bring about a new output wave stateside as many market commentators think, DGOC's contribution is over 92,000 barrels of oil equivalent per day (boepd) to that pool and rising.

You can expect more of the same, and more, Hutson assures the Oilholic. More observations from the trip to follow for publishing outlets but that's all for the moment folks! Keep reading, keep it 'crude'!

Addendum I - 27.09.19: Thoughts via Rigzone - 'Smart' Appalachian Operators Can Handle Sub $2 Natural Gas. Click here.

Addendum II - 07.10.19: Thoughts via Forbes - Enhanced Recovery Maverick: Meet West Virginia Oilman Taking Resource Maximization To New Heights. Click here.

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© Gaurav Sharma 2019. Photo I: Morgantown, West Verginia, US from the air. © Gaurav Sharma, September 2019. Photo II & III: Gaurav Sharma onsite with DGOC personnel in Pennsylvania, US © Ben Romney, September 2019. 

Two crude charts that say it all

We are nearly at the end of the third quarter of the current oil trading year and the Oilholic has two relevant charts for you. The first figure below (click images to enlarge), offers a glimpse into the OPEC Crude Basket of its member exporters' prices, and it is currently averaging just shy of $65 per barrel. 

The second figure tracks the Friday closing prices of oil benchmarks year to date, which points to the fact that oil futures, while volatile, are still oscillating in a fairly predictable range, unable to breach a $50 per barrel floor or meaningfully escape a $70 per barrel ceiling.

Figure I

Figure II

As this blogger has said before; oil prices remain range-bound and are going nowhere fast. Keep reading, keep it 'crude' folks!

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© Gaurav Sharma 2019. Charts: Figure I - Direction of OPEC's crude basket. Figure II - Friday closes of oil benchmark prices, year till Friday, 23 August, 2019  © Gaurav Sharma, August 2019

Various media missives on energy market

The last fortnight has just zipped by with so much going on in the energy market that the Oilholic did not get time to pen his thoughts here (apologies!). However, here are a plethora of thoughts for various publishing outfits on various energy related subjects. 

First off, despite all the geopolitical pressures, worries of an escalating trade war continues to be the dominant bearish sentiment in the market and could turn mildly bullish if resolved. So here are some thoughts on Forbes in defence of those with bearish oil price forecasts who some say are being complacent, alongside a note on the prospects of US Midstream stocks. 

And a take on why Formula E versus Formula 1 motorsports offer a microcosm of the tussle for human mobility. Away from Forbes here is yours truly's article on the Big Data tsunami that is heading the oil and gas industry's way via Rigzone.

Finally, here's a take on the cybersecurity challenge the energy industry faces on Energy Post (behind paywall). More on this mad, mad crude market soon. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2019.

Gauging Wall Street's 'crude' mood

The Oilholic has just about rounded up a near week-long power markets trip to New York, including a visit to understand the energy supply dynamic of the City’s landmark Rockefeller Center courtesy of industry colleagues at ABB, and a weekend of Formula E racing. 

But when in New York City old habits die hard, and this blogger rarely misses opportunities to discuss the oil market direction with fellow analysts and crude traders. The latest visit was no exception. Even New York's weather of the past week chimed with what we've seen in the crude market. On Thursday (July 11) the Oilholic arrived to a rain drenched Wall Street (above left) full of soggy bears with both oil benchmarks on the rise and WTI futures even touching $60 per barrel at one point (Brent - $66.52/bbl & WTI $60.20/bbl). 

Yet by the time yours truly packed it in a week later, New York and its Wall Street oil market bears were again basking in the sunshine (Brent at $61.93/bbl & WTI $55.30/bbl) even if Iran's grab of a UK-flagged Swedish-owned oil tanker Stena Impero in the Strait of Hormuz added another dollar or two per barrel. And for all the kerfuffle, the inescapable truth is that both benchmarks have stayed range-bound. 

The Oilholic has assigned the reasons as - the abundance of US light crude (especially copious amounts being exported to Asia), deep concerns over global demand (and a possible negative quarter if not a full blown recession for the US economy on the horizon), and supply dynamic largely outweighing OPEC cuts over the near-term.

One has also said it on record that if the oil market bears are to be tamed, the key bullish factor on the horizon is not the Iranian shenanigans in the Persian Gulf (short of an unlikely all out war), but the easing of US-China trade tensions. 

Putting these thoughts to a select group of Wall Street analysts this blogger has known for over 10 years, came up with unsurprisingly similar conclusions. Ok, discussing market direction with a beer in the Fraunces Tavern in the company of seven industry acquaintances is hardly a scientific poll, and more of an indicative opinion – but whichever way you look at it, few put forward an obvious bullish breakout factor that would pull the oil price from its current range. 

Many see a $70 level as a near-term possibility for Brent, as does the Oilholic, but few reckon the level would be meaningfully capped given clouds on the 2020 horizon. 

More so, many agree that OPEC’s market credibility is now tied to how much and how far the Russians go along with its – or should we their own – agenda, as the Oilholic recently wrote for Rigzone. 

Away from the near-term, most expect the US production to provide a meaningful buffer for a minimum of five years. In that time, the supply-demand dynamic is bound to face profound changes and resulting scenarios could be materially different from where we currently are. To sum it up, the Oilholic has a $65-70 per barrel 2019 average price for Brent, and $55-60 per barrel for WTI; with both leaning towards the lower end of the range, bar a full-blown conflict in the Persian Gulf. 

As one wrote for Forbes, right after OPEC’s twice-delayed oil ministers’ summit; 2020 could get even more bearish. Many known contacts on Wall Street share that opinion, and the time they spared at such short notice this week is truly appreciated. And on that note, its time to say goodbye to NY Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2019. Photo 1: New York Stock Exchange, NewYork, USA. Photo 2: Wall Street, Lower Manhattan, New York, USA © Gaurav Sharma, July 2019.