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More for longer and highly vulnerable ($75-85/bl)



SEB - analysbrev på råvaror
SEB - Prognoser på råvaror - Commodity

The message from Saudi Arabia is now that it will take longer than first expected before production is fully back to normal. We are also getting military assessments saying that attacks of the nature seen on Saturday in Saudi Arabia are fundamentally difficult to protect against and that you basically need to take out the threat before it lifts off the ground. So more for longer and highly vulnerable for future, comparable attacks is the current assessment.

That is all together more bullish than the market action during most of Monday trading session when Brent crude after the first initial spike to close to $72/bl quite quickly fell back again to ~$65/bl.

We have lived so long now with abundant and booming US shale oil production growth that it is hard to shake the market out of its overwhelming sense of affluence. And in some aspects the market has some rights in being relaxed as OECD commercial inventories in July stood some 300 m bl above where they were in mid-summer 2014 while non-OPEC supply will grow strongly in 2020.

The current cooling global economic growth is also having a strongly dampening impact on the oil market sentiment. We don’t need to go further back than late April when we had a Brent crude oil price of close to $75/bl. Following Saturday’s strike at the center of the global oil market the oil price did not even manage to get up to the level where Brent traded for more normal reasons in April. That tells you that there is quite a broad based sentiment holding a bearish hand over the market.

It has been reported that US shale oil players are utilizing the bounce in the oil prices as an opportunity to add forward hedges at higher prices. I.e. their main take at the moment is that oil prices will likely fall back again rather than spiral upwards. So take the added gain in prices and run.

Speculators with short positions in the market may however think differently in the face of more outage for longer in Saudi Arabia and fundamentally vulnerable installations versus future potential attacks. It would be sensible to cut the losses and close such short positions for now in our view given the latest information. Consumers who have held back on forward buying in the hope for lower forward prices for 2020 and 2021 may also cave in and buy before a potential new attack on Saudi Arabia’s oil installations materializes.

Thus while market participants are still quite relaxed about the whole situation they may now gradually start to change their mind with shorts likely covering positions and consumers buying before any new attacks potentially can occur.

So what about counter attacks? Saudi Arabia is now fully blaming Iran (or at least saying it was Iranian military material) and has stated that the attack was a mix of Iranian drones and rockets. Given the severity of the attack on Saturday it is difficult to see how Saudi Arabia cannot retaliate. But if Saudi Arabia is fundamentally vulnerable and unable to protect itself from comparable future attacks how can they retaliate? It would seem to be more or less like asking for yet more damages to Saudi Arabia’s oil infrastructure down the road.

Donald Trump on the other hand has pulled away from “Locked and loaded” and stated that what he meant was that the US is loaded with oil and with no need for Middle East oil. What a great twist!!

When Donald Trump kicked out the US national security adviser John Bolton one week ago it looked like Donald Trump wanted to move towards negotiations with Iran’s president Hassan Rouhani.

If the US now joins in with Saudi Arabia with a retaliatory attack on Iran it would weaken president Rouhani while it would strengthen the position of Iran’s Revolutionary Guard which is probably the once who stood behind Saturday’s attack on Saudi Arabia in the first place. I.e. it would strongly reduce the possibility for the US to move down a negotiating path with president Rouhani which is probably what is needed in order to get out of this mess.

Ram Yavne, a retired brigadier general in the Israel Defense Forces has stated according to Bloomberg: “Iranian’s have tried several times to raise the price of oil to show the world that the price for blocking Iran’s ability to produce oil is very high”.

Even though the US now has become more or less self sufficient with oil (at least if you include imports from Canada) and that it does not need to entangle it selves in armed conflicts in the Middle East in order to safeguard supply of oil there it’s economy still strongly impacted by higher or lower oil prices.

Thus a sharply higher oil price will be an additional negative headwind for a slowing global economy and a slowing US economy. As such it is also a threat to the re-election of Donald Trump in November 2020 who need happy consumers in a blossoming US economy to re-elect him.

It is difficult to see how we are going to get out of this mess, but it may seem like Iran has a very strong position. With little effort it can do a lot of damage to both Saudi Arabia and to Donald Trumps potential to be re-elected. If Donald Trump will have to eat humble pie or can get out of this without loosing face remains to be seen but this is indeed a tricky situation.

For now the market is preparing itself for a likely counter attack from Saudi Arabia towards Iran (with potential further snowballing effect) unless Donald Trump is able to miraculously diffuse it.

With respect to oil prices we think that the latest assessment of the situation in Saudi Arabia looks more severe than what it looked like on Sunday. On Sunday we expected that the Brent crude oil price would jump to $65-70/bl which is what we have seen today. Given the latest information from Saudi Arabia of ”more outage for longer” and military assessments of ”highly vulnerable for future comparable attacks” we think a higher oil price is warranted. Again it will in the end boil down to details on how much the market actually looses of supply. But a Brent crude oil price trading around $75-85/bl sees highly sensible to us in the current situation.

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