Saudi Aramco’s debt under pressure

Bonds in Saudi Arabia’s state energy company Aramco have sustained a modest decline in price after this weekend’s attacks.

Saudi Aramco’s dollar-denominated debt maturing in 2049 has fallen more than 2 cents in price to 105.8 cents on the dollar, according to Refinitiv data. That has pushed the yield up 0.11 percentage points to 4.03 per cent.

Russia: No need for urgent measures

Henry Foy, the FT’s Moscow bureau chief, reports:

Russia does not see the need for urgent measures in response to the attack, the country’s energy minister said, adding that he would speak to his Saudi counterpart later on Monday.

“There is no need to undertake any extra urgent [steps],” Alexander Novak said. “At present, as we understand it, there are enough commercial reserves in the world to ensure that in the medium term the shortage of oil that we see is covered by supplies from commercial reserves.”

Russia and Saudi Arabia have worked in tandem in recent years to pare back oil production as part of a deal with the wider OPEC cartel to prop up prices.

Mr Novak said that the so-called OPEC+ deal was still in force and would be adhered to, unless its members agreed to meet and make adjustments.

“Nobody changed the parameters of the deal… everyone should fulfill their obligations. If there are really any needs and force majeure – we can always get together and discuss some other parameters,” Mr Novak said, in remarks carried by Russian news agencies.

“Everything depends on the speediest assessment of the consequences, which is carried out by Saudi colleagues, and after that it will be possible to understand the scale of the impact on production and supply.”

European open: Energy stocks jump, airlines hit

Shares in energy companies are leading the way higher, while airlines are the biggest laggards, as European equities trading gets underway.

Here’s a rundown of some of the biggest movers around 10 minutes into trading:

Up:

-Wood +5%
-Tenaris +4.5%
-BP +3.8%
-Royal Dutch Shell +3%
-Total +2.9%

Down:

-Ryanair -4.5%
-Air France KLM -4.2%
-EasyJet -3.3%
-Airbus -3.2%
-Deutsche Lufthansa -2.9%

UBS: Bad news for Asian equities

Hudson Lockett, the FT’s Asia capital markets correspondent, reports from Hong Kong:

Niall MacLeod, UBS investment research strategist for Asia Pacific, said that the disruption was likely negative for Asian equities because Monday’s price moves were not driven by demand.

Oil price spikes driven by demand have generally been positive for equities in [Asia Pacific]. By contrast oil price spikes on supply shortages are usually bad.

Past correlation of weekly supply-driven moves in oil prices and equities suggests a 5 per cent, 10 per cent and 25 per cent jump in oil would hit Asia ex-Japan equities by 1.2 per cent, 2.4 per cent and 5.9 per cent, respectively.

At the macro level, there are four drivers for equities:

1. The energy impact on trade balances;

2. The pass-through to inflation and degree to which this could impact monetary policy;

3. Past correlations of oil to the exchange rate;

4. The size of the oil sector in an individual equity market.

READ ALSO  Germany’s blue-chip Dax to expand in wake of Wirecard debacle

‘God’ speaks

Andy Hall – arguably the most successful oil trader of his generation – has given his insights on the weekend’s developments exclusively to the FT.

Over a near 45-year oil trading career, Mr Hall gained a reputation for landing on the right side of some of the biggest bets in the market’s history.

He earned the nickname “God” in 1990 when he made an incredibly risky bet on the price of oil ahead of Saddam Hussein’s invasion of Kuwait – the last time crude spiked as much as it did on today’s open.

Mr Hall shut down Astenbeck, the world’s largest energy hedge fund, in 2017 but remains a keen follower of the market.

Here is what he had to say this morning to the FT’s energy editor David Sheppard:

Obviously this is a huge development. The loss of production is comparable with that during Saddam’s invasion of Kuwait. An SPR release in the US isn’t going to help offset it much as US crude export capacity is maxed out and opportunities for import substitution are very limited.

Ironically, the Saudis have run down their own excess crude/strategic inventories in recent years and these now appear to be at multi-year lows if published data are to be believed.

OPEC “spare capacity” consists primarily of Iranian production constrained by US sanctions. It seems unlikely they will be lifted in the current circumstances! A meaningful production response elsewhere would take years even for US shale which has anyway seen it’s production growth start to roll over and would quickly encounter infrastructure and other constraints.

This attack underscores the vulnerability of oil production facilities in the Middle East in particular and the world in general. All the tens of billions of dollars the Saudis have spent on weapons could not protect them from a dozen or so low tech drones. Asymmetrical warfare indeed!

It would seem the oil market needs to not only price in the current supply loss but also a higher risk premium for the future. On the other hand, the apparent fragility of the global economy will now be further tested by an oil price spike.

Buckle up!

READ ALSO  Biden Confirms First Latino Homeland Security Chief Among List Of National Security Cabinet Picks

Turkish lira hit by jump in oil prices

The FT’s Laura Pitel reports:

The Turkish lira was down almost 1 per cent against the dollar after local markets opened on Monday. Turkey is heavily reliant on energy imports, meeting more than 80 per cent of its total energy needs with purchases from abroad, according to the OECD. Thirty per cent of its total primary energy supply comes from oil.

ING: Attack underlines vulnerability of Saudi infrastructure

Analysts at Dutch bank ING point out that what happened this weekend demonstrates that the Kingdom is susceptible to severe disruption from direct attacks on its facilities.

Warren Patterson, head of commodities strategy at ING, notes:

Whilst many have been worried about disruptions to oil flows through the Strait of Hormuz, this latest incident does suggest that such attacks can prove even more disruptive.

Furthermore, is the uncertainty of how the Saudis will respond to the attack, but what is certain is that the market needs to price in a risk premium for the simmering tension in the region.

Mr Patterson adds that “any indication or confirmation” from the Saudis of a prolonged outage, would see Brent trading back above $70 a barrel in the near term.

Barclays: Attack raises ‘supply-side tail risks’

The attack on one of Saudi Arabia’s key oil facilities will prompt market participants to re-price the risk of unexpected shocks to world energy supplies, Barclays has said.

The UK-based investment bank reckons that while “exports will likely not be impacted significantly” by the attack over the weekend, there will be a material shift in the way markets perceive tail risks, or low probability, high impact events.

Barclays oil analyst Amarpreet Singh notes:

Market expectations of supply-side tail risks will likely reset. At a time when oil markets have been in the shadows of a weak global macroeconomic backdrop, the attack on critical Saudi oil infrastructure calls into question the reliability of supplies from not just one of the largest net exporters of crude oil and petroleum products but also the country that holds most of the world’s spare production capacity.

Total OPEC spare production capacity stood at 2.2m barrels per day in Q2 19, according to the IEA, almost all of which was likely held by Saudi Arabia, by our estimates. This, coupled with a heightened geopolitical risk premium as investors assess the probability of a re-negotiated Iran nuclear deal, will likely provide a more lasting boost to oil prices in our view .

READ ALSO  Vaccinating a nation: can Biden manage America’s biggest health project?

What you need to know

So what are the key facts?

– An attack on Saturday set two major Saudi Arabian oil facilities – Abqaiq, a vital crude processing centre, and the Khurais oilfield – ablaze, hitting more than half of the Kingdom’s crude production.

– The US has said the attack was orchestrated by Iran and Iran-backed Houthi militias in Yemen have claimed responsibility.

– Yesterday it emerged that Saudi Arabia is now looking at weeks without full crude and gas production capacity.

– The market has yet to receive clarity as to how long it will take the Kingdom to restore output towards the 9.8m barrel a day level of before the attack.

– As a result oil rocketed upwards on Monday’s open, with Brent gaining as much as 20 per cent to above $71.00 a barrel – the largest move in percentage terms since Saddam Hussein invaded Kuwait in 1990.

– It has since pared some of those advances to trade up 10 per cent at $66.31 a barrel.

Good morning

Welcome to the FT’s latest live blog.

The price of oil rocketed overnight after an attack on Saudi Arabia’s oil infrastructure hit more than half of the country’s production.

Brent crude opened up more than 20 per cent ­- its biggest percentage jump since Saddam Hussein invaded Kuwait in 1990 – on fears that the Kingdom’s oil output will be well below maximum capacity for weeks.

We’ll be following developments today live in this blog, with the latest insight from the FT’s energy team and regional correspondents. If you are just catching up with what has been happening, here’s some reading to get you started.

Oil prices soar after attacks halve Saudi output

Saudi Arabia faces weeks without full oil production after attack

Via Financial Times