The week is just getting started and already the price of oil has played out a range of emotions based upon mixed messages. Not only are we getting mixed messages about how fast Saudi’s oil production can recover from last weekend’s attack but we are also getting mixed messages on the state of the global economy with weak manufacturing data coming out of Europe. Iran is sending mixed messages as well. On the one hand they are threatening the possibility of all-out war and on the other hand holding out the olive branch by releasing the British-flagged tanker the “Stena Impero” it seized in July. This comes as Iran’s President Hassan Rouhani says he is going to announce a so-called regional peace plan for the entire Persian Gulf region. This comes as world leaders head to the UN on Tuesday to discuss the attack on the Saudi oil fields among other things. Yet can there be peace when the Wall Street Journal is reporting that Houthi militants in Yemen have warned foreign diplomats that Iran is preparing a follow-up strike to the missile and drone attack that crippled Saudi Arabia’s oil industry a week ago?
Crude oil gaped opened higher Sunday night as the Wall Street Journal seemed to confirm skepticism about how quickly Saudi Arabian oil production can recover from last week’s attack. The Journal wrote, “The Saudi Arabian Oil Co. is in emergency talks with equipment makers and service providers, offering to pay premium rates for parts and repair work as it attempts a speedy recovery from missile attacks on its largest oil-processing facilities, Saudi officials and oil contractors said. It may take many months—rather than the maximum 10 weeks company executives have promised—to restore operations to full working order, they said.” Yet this morning Saudi Arabia reports that Khurais and the Abqaiq oil facilities are producing about 4.3 million barrels a day. The Saudis are still claiming they can bring full production on by early next week.
That news, along with the report of Iran releasing the UK tanker, took away oil’s Saudi supply worries spike. Oil also slid on the flash reading of composite German PMI (purchasing managers’ index) coming in at 49.1 in September, down from 51.7 in the previous month. The manufacturing sentiment came in at 41.4. That was the lowest reading in 10 years.
Yet we have to go to a reality check. I have to go with industry insiders that doubt the Saudi oil production comeback story. As the Wall Street Journal wrote, “Saudi officials say there is little sense of calm at the highest levels of the company and the Saudi government, however. It could take some contractors up to a year to manufacture, deliver and install made-to-measure parts and equipment, the Saudi officials and the oil contractor said." “We are still in a frantic search for spare parts,” one Saudi official said. “It is not really as great [and] rosy as you may think.”
On top of that as we said last week, even if the Saudis can produce oil, can they process the grades that their customers want? Probably not. Reuters reports that “State oil giant Saudi Aramco has switched crude grades and pushed back crude and oil product deliveries to customers by days after the attacks on its supply hub severely reduced its light oil production and led to output cuts at its refineries. Crude oil loading delays were widespread as most buyers have received Aramco’s request to push back shipments in October by 7-10 days, several sources with knowledge of the matter said, giving the producer more time to maintain exports by adjusting supplies from inventories and its refineries. At least three supertankers that loaded crude in Saudi Arabia this week for China and India had their crude grades switched from light to heavy oil while more buyers in Asia have been asked to delay shipments and switch grades in September and October, according to sources with knowledge of the matter and data from Refinitiv and Kpler."
Do we really think that Iran’s release of an oil tanker will make the world want to put Iran in charge of regional security, just after they allegedly bombed Saudi Arabian oil fields?
And then we have to consider the impact on the U.S. oil supply. U.S. oil exports will surge. Products will as well. Actually petroleum supply will start to draw dramatically after we pass through the impact from all of the tropical storms. Tropical Storm Imelda did a lot more damage than most people thought it would.