Oil Prices Soar After Major Saudi Facility Drone Attack
Early-rising traders woke up to see oil prices screaming 10% higher as the market digested news of drone attacks on Saudi Arabia's oil production so crippling they're already being called a “Pearl Harbor moment.”
Based on early reports, multiple relatively inexpensive drone devices were able to pierce Saudi defenses in a way that a traditional air force could not: flying long distances to drop potent bombs that apparently set vast portions of the Saudi petroleum infrastructure ablaze.
The attacks targeting the massive Abqaiq oil facility (the largest in the world) have reportedly knocked out half of Saudi Arabia's total oil production — about 5% of global supply.
President Trump responded in a tweet:
Houthi rebels in Yemen initially claimed responsibility for the attack. However, both Saudi Arabia and the United States deny this claim.
Secretary of State Mike Pompeo wrote on Twitter:
Iran is, for now, denying responsibility. Iranian Foreign Minister Javad Zarif accused Pompeo of engaging in deception, saying on Twitter:
Other reports suggest the attacks may have originated in Iraq. But it looks likely the strikes will for now be blamed on Iran.
The question on everyone's mind right now is: Will this lead to an all-out hot war between Saudi Arabia and Iran?
The smartest answer is: maybe.
This is, no doubt, a very serious attack. Saudi Arabia's oil and gas sector accounts for about 50% of its GDP and some 70% of its exports. So a strike that took out half of production is devastating for the country.
But Saudi Arabia and Iran have been at each other's throats for decades fighting wars by proxy — participating in both sides of civil wars in Syria, Yemen, Iraq, and nearly every other geopolitical dispute in the region. If an official declaration of war is made between Saudi Arabia and Iran, it's long overdue.
The targeted attack on the Abqaiq oil facility caused crude prices to soar. WTI crude for October delivery was trading up almost 10% at market open this morning to over $60 per barrel.
This is the second time in three months we've seen oil prices jump after recent conflicts involving Iran and drones. Oil prices jumped almost 5% after Iran shot down a U.S. surveillance drone in June.
The Abqaiq is significant for both Saudi Arabia and Saudi-Iranian relations.
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For the American oil market, however, it's less important. Don't get me wrong; we are talking about a significant disruption of crude supply. As I already mentioned, half of Saudi Arabia's total supply is about 5% of global supply. But it's not so significant it should keep us up at night.
The United States is still producing record amounts of oil. Back in May, America broke a monthly record of 12.5 million barrels of oil per day. The U.S. is, in fact, the world's largest oil producer right now. So I have to agree with President Trump's follow-up tweet to his attack response:
At least in America.
There have been many critics of oil and gas development. Thousands have protested pipelines and fracking, and thousands of others offshore drilling and exploration.
And sure, we can understand parts of their arguments as legitimate. No one really wants to see the environment completely spoiled. But the fact is the development of domestic energy resources has been critical to the nation's economy. Without the development, which was so protested, events such as the Abqaiq attack would affect Americans much more directly.
I think this recent attack really underscores the importance of American oil and gas development.
In states like Texas, oil and gas development has been growing so fast that infrastructure in areas around the Permian Basin have been strained. Local authorities have been dealing with electricity, water, and housing shortages as well as heavy truck traffic that quickly deteriorate roads.
But thank God for them.
Today, the Permian Basin is the largest producing oil field in the world — even bigger than Saudi Arabia’s Ghawar. The EIA reports oil production from the Permian currently at 4.2 million barrels per day. That's compared to Ghawar's production of 3.8 Mbbls/d.
The Permian Basin is the largest oil and gas region in the world right now in terms of production, and estimates of its underdeveloped energy resources are growing.
But the Permian Basin is just one of a small handful of other undeveloped oil and gas basins. And there could be more tight oil and gas in and around Texas than anyone ever thought, just waiting to be discovered and developed.
Resident Permian Basin expert Keith Kohl says, “For sure, there are billions of barrels of recoverable oil in and around the Permian Basin that haven’t even been counted yet. Potentially trillions of dollars just waiting to be found.”
Keith has recently published an entire report that discusses these “secret” oil and gas basins in Texas. I highly urge you to look into these alternative basins before Main Street learns about them.
Until next time,
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
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