How Much Will Oil Surge When Trading Reopens

Now that Goldman has successfully sparked a near-frenzy of chaos, confusion (and market buy orders) ahead of tonight's trading open, the only question is how high will oil surge. And according to some preliminary estimates, oil analysts expect crude prices to jump at least $5 to $10 a barrel at 6pm on Sunday after some 5% of world oil supply was pulled off the market after a drone strike hit a critical Saudi oil facility.

Saudi Aramco lost about 5.7 million barrels per day of output after several unmanned aerial vehicles on Saturday struck the world’s biggest crude-processing facility in Abqaiq and the kingdom’s second-biggest oil field in Khurais. And with Saudi Arabia admitting that it could take weeks to restore full production, Bloomberg reports that the Trump administration is ready to deploy the nation’s emergency oil reserves and help stabilize markets if needed.

While oil slumped 3% last week, dropping amid expectations of an Iran detente following John Bolton's departure, expect a violent reversal when trading reopens tonight.

"This is a historically large disruption on critical oil infrastructure and these events represent a sharp escalation in threats to global supply with risks of further attacks", wrote Goldman chief commodity strategist Damien Courvalin. "These events are therefore set to support oil prices at their open on Sunday, especially given recent growth concerns and low levels of positioning. The magnitude of such a price rally is difficult to estimate in the absence of official comments on the timeline and scale of production losses."

Still, one can try to make some educated estimates of what happens next, with consensus gravitating to a $5-10 spike in kneejerk response. The only reason why traders don't expect a higher spike is because Saudi Arabia has millions of barrels stored in locations around the world, which they can draw down to replace the lost production. A rally could also be tempered if the U.S. and other countries release oil from their strategic reserves to ease the shortfall, according to Bloomberg.

Here are the expectations of several analysts, compiled by Bloomberg:

  • “We can expect oil prices to be $5/bbl higher when it opens,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston. “The events over the weekend show the vulnerability of oil facilities in the Mideast.”
  • ClearView Energy Partners LLC sees potential for prices to rise $10 a barrel, assuming a three-week shutdown, according to a note to clients. If damage turns out to be extensive and the outage is extended, they expect a loosening of OPEC+ supplies and a coordinated release of strategic reserves from the U.S. and elsewhere.
  • “Brent could go to $80 tomorrow, while WTI could go to $75,” said Sandy Fielden, director of research for Morningstar Inc. “But that would depend on Aramco’s 48-hour update. The supply problem won’t be clear right away since the Saudis can still deliver from inventory.”

  • “The initial move higher will depend on the strength of short-covering,” Ole Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen, said by email. “We finished last week on a weak note after monthly oil market reports pointed to a prolonged supply glut.”
  • “Brent should regain much of the premium lost to West Texas Intermediate over the past few months. Rapidly increasing U.S. supply, the likelihood of releasing crude from the Strategic Petroleum Reserve and potential for a ban on exports should provide a greater boost to the benchmark”, according to Bloomberg commodity analyst Mark McGlone

Separately, while we shared a Goldman sales email earlier - one whose general tone was bordering on panic and chaos - a separate research note published by Goldman commodity strategist Damien Courvalin, lays out four possible shhutdown scenarios, and the price oil could hit for each:

  • A very short outage – a week for example – would likely drive long-dated prices higher to reflect a growing risk premium, although short of what occurred last fall given a debottlenecked Permian shale basin, a weaker growth outlook and prospects of strong non-OPEC production growth in 2020. Such a price impact could likely be of $3-5/bbl.
  • An outage at current levels of two to six weeks would, in addition to this move in long-dated prices, see a steepening of the Brent forward curve (2-mo vs. 3-year forward) of $2 to $9/bbl respectively. All in, the expected price move would be between $5 and $14/bbl, commensurate to the length of the outage (a six month outage of 1 mb/d would be similar to a six week one at current levels).
  • Should the current level of outage be announced to last for more than six weeks, we expect Brent prices to quickly rally above $75/bbl, a level at which we believe an SPR release would likely be implemented, large enough to balance such a deficit for several months and cap prices at such levels.
  • An extreme net outage of a 4 mb/d for more than three months would likely bring prices above $75/bbl to trigger both large shale supply and demand responses.

For those asking at what price the US may release oil from the SPR, here is a Goldman sensitivity table laying out what price levels (shaded) are likely to spark SPR drawdowns.

That said, now that the US is a net petroleum exporter, the SPR has - according to Goldman - become redundant and could be drawn down extensively.

Courvalin lists a few final price/production considerations: From a crude quality perspective, replacement OPEC+ (Russia, Kuwait, UAE) and US SPR barrels are of similar API and sulfur content as the potential disrupted Saudi production (Ghawar, Khurais).

Even so, heavy, high-sulfur crudes will also likely be in demand due to the type of oil that was taken off the market:
Andy Lipow on Dubai: "I would expect sour crude differentials to get stronger given the Saudis exports are heavier and have higher sulfur crudes." Should the disruption lead to a deficit, this would nonetheless reduce global medium sour crude supplies and tighten the Brent-Dubai spread.

Separately, any large rally in deferred prices next week would represent an opportunity for producers to hedge their expected production for 2020 and 2021 (where coverage remains very low). Ironically, higher US shale oil production on the back of a sustained rally in prices would further create downside risk to US gas prices, with higher associated gas production in the face of limited demand growth in coming years requiring even lower Appalachia and Haynesville gas production. In other words, a surge in gas prices tomorrow, offset by tumbling gas prices 1-2 years from now.... just in time for president Elizabeth Warren to end all US shale production.