It was a wild ride, but oil prices fell again on Wednesday, pushing them back near levels seen earlier this month. Despite the largest supply outage in oil market history, the spike could prove to be shockingly brief.
Saudi energy minister Prince Abdulaziz bin Salman soothed market fears on Tuesday when he stated that roughly 40 percent of the disrupted capacity at Abqaiq was back online, and that the facility would return to pre-attack levels by the end of the month. It appears to be a startlingly swift rebound for such a massive attack.
There are uncertainties, however. “Don’t get too excited. There is clear risk of a slower restart of Saudi Arabian oil production despite the optimistic guidance by Saudi Aramco,” Rystad Energy chief oil market analyst Bjørnar Tonhaugen said in a statement. Rystad estimates that around 1.6 million barrels per day (mb/d) of Arab Light and 0.35 mb/d of Arab Extra Light production would remain shut-in on average through October. “In our view, there is a clear risk of a slower resumption towards full capacity,” Tonhaugen added.
The confident tone from the press conference might have been calculated to ease fears heading into the Saudi Aramco IPO. “It is possible that this public display of optimism is related to the planned IPO of Saudi Aramco, as this requires a positive market environment and the trust of investors,” Commerzbank wrote in a note.
Nevertheless, for an oil market that is only temporarily tight, and is facing a huge supply surplus in 2020, even a delay of returned capacity might not alter the overarching dynamic in the market. Supply is growing and demand is weak. In any event, the Saudi energy minister added that export levels would be uninterrupted as the country plans to use inventories to make up for the production shortfall over the next few weeks.
With that said, the next question is how Saudi Arabia, and perhaps the United States, might respond. “Today, Saudi Arabia plans to present proof that Iran was involved in the attacks. If this proof holds water, retaliatory measures by the US and Saudi Arabia will become more probable,” Commerzbank said on Wednesday. “This would justify a higher risk premium on the oil price.”
Both Riyadh and Washington have sent mixed messages on this front. Immediately after the attack, Secretary of State Mike Pompeo directly blamed Iran. President Trump said the U.S. was “locked and loaded,” and was “waiting to hear from the Kingdom as to who they believe was the cause of this attack, and under what terms we would proceed!”
After a firestorm erupted in Washington surrounding Trump’s decision to essentially hand over U.S. foreign policy and military decision-making to the Saudi monarchy, he backtracked. Hours later, Trump struck a different tone, saying that he didn’t want war with Iran. And when a reporter asked Trump whether or not he promised to protect the Saudis, his fealty to Riyadh didn’t seem as rock solid. “No, I haven’t. No, I haven’t. I haven’t promised the Saudis that,” he said. “We have to sit down with the Saudis and work something out. And the Saudis want very much for us to protect them, but I say, well, we have to work. That was an attack on Saudi Arabia, and that wasn’t an attack on us.”
The whiplash in the American position continued. Pompeo jetted off to Saudi Arabia, where he said on Wednesday that the Abqaiq attack was carried out by Iran and was “an act of war.” However, the Wall Street Journal has reported that the Saudis themselves said that evidence from American intelligence regarding Iran’s involvement “wasn’t definitive.”
On Wednesday, Saudi Arabia presented its case that they say implicates Iran, although as the New York Times pointed out, the evidence didn’t appear to be definitive proof either.
Still, the working theory is that Iran was behind the attack, a case that the Pentagon could bolster if it releases an assessment later this week. The Houthis have claimed responsibility, but many analysts question their ability to carry out an attack alone.
On Tuesday, Senator Lindsey Graham (R-SC) tweeted that Trump’s last minute decision not to attack Iran in June following the downed American drone “was clearly seen by the Iranian regime as a sign of weakness.” Trump responded on twitter: “No Lindsey, it was a sign of strength that some people just don’t understand!”
Against this messy and confusing backdrop, it is not immediately clear what the response might be. Many analysts have suggested that the U.S. might opt for a narrower retaliation, such as a cyberattack against Iran. “We’re working to build out a coalition to develop a plan to deter them,” Pompeo said in Jeddah on Wednesday.
Even if Iran was heavily or even directly involved, the Pentagon has privately urged caution, not an aggressive response, according to the Washington Post. Top military officials reportedly are wary of another war in the Middle East, especially in response to an attack that involved no Americans.
More importantly, they recognize that despite Trump’s brash confidence, a war would likely be catastrophic. “Pentagon officials have also stressed the risks to the at least 70,000 U.S. personnel stationed under U.S. Central Command, which stretches from Egypt to Pakistan, if tensions with Iran spin out of control,” the Washington Post wrote.
In the interim, Trump announced a tightening of sanctions on Iran. The most surprising thing about that move is that there is hardly anything left in Iran that is unsanctioned.
Meanwhile, news reports suggest that Iranian President Hassan Rouhani might not attend the UN General Assembly meeting in New York next week due to delays in obtaining a visa from the U.S. government. That at least puts to rest the question about whether there might be a Trump-Rouhani meeting, potentially closing off at least one (albeit unlikely) avenue of de-escalation.
The problem for Riyadh and Washington is that if Iran was behind this, as many think, then it demonstrates their ability to disrupt the oil market. Because of punishing American sanctions, Iran has lost most of its oil exports, so it has much less to lose. With Trump heading into a reelection campaign, he doesn’t have the appetite to start a regional war, which could drive up gasoline prices. Iran’s gambit is risky, but there are also enormous risks for Saudi Arabia and the U.S. in retaliating.
Saudi Arabia has pressed the U.S. for years to take a hard line on Iran, and the U.S. government has confidently pushed Iran’s back against the wall over the past year and a half. But now with a major war closer than ever, neither Riyadh nor Washington are no longer sure they want it.
By Nick Cunningham of Oilprice.com
