Oil posted its biggest ever intraday jump, briefly surging above $71 a barrel after a strike on a Saudi Arabian oil facility removed about 5% of global supplies and raised the specter of more destabilization in the region.
In an extraordinary start to trading on Monday, London’s Brent futures leaped almost $12 in the seconds after the open, the most in dollar terms since their launch in 1988. Prices have since pulled back about half of that initial gain of almost 20%, but are still heading for the biggest advance in almost three years.
For oil markets, it’s the single worst sudden disruption ever, and while Saudi Arabia may be able to return some supply within days, the attacks highlight the vulnerability of the world’s most important exporter. They also revive political risk in prices, with the heightened danger of conflict in a region that holds almost half of global crude reserves.
“We have never seen a supply disruption and price response like this in the oil market,” said Saul Kavonic, an energy analyst at Credit Suisse Group AG. “Political-risk premiums are now back on the oil-market agenda.”
The dramatic move in oil reverberated around financial markets. Haven assets including gold and Treasury futures surged on concern over the geopolitical fallout from the attacks. Currencies of commodity-linked nations including the Norwegian krone and the Canadian dollar also advanced. U.S. gasoline futures jumped almost 13% before paring their increase to around 8%.
State energy producer Saudi Aramco lost about 5.7 million barrels a day of output on Saturday after 10 unmanned aerial vehicles struck the world’s biggest crude-processing facility in Abqaiq and the kingdom’s second-largest oil field in Khurais.
The disruption surpasses the loss of Kuwaiti and Iraqi petroleum output in August 1990, when Saddam Hussein invaded his neighbor. It also exceeds the loss of Iranian oil production in 1979 during the Islamic Revolution, according to the International Energy Agency.
“The vulnerability of Saudi infrastructure to attacks, historically seen as a stable source of crude to the market, is a new paradigm the market will need to deal with,” said Virendra Chauhan, a Singapore-based analyst at industry consultants Energy Aspects Ltd. “At present, it is not known how long crude will be offline for.”
Saudi Arabia can restart a significant volume of the halted oil production within days, but needs weeks to restore full output capacity, people familiar with the matter said. The kingdom — or its customers — may use stockpiles to keep supplies flowing in the short term. Aramco could consider declaring itself unable to fulfill contracts on some international shipments — known as force majeure — if the resumption of full capacity at Abqaiq takes weeks.
That would rattle oil markets further and cast a shadow on Aramco’s preparations for what could be the world’s biggest initial public offering. It’s also set to escalate a showdown pitting Saudi Arabia and the U.S. against Iran, which backs proxy groups in Yemen, Syria and Lebanon. Iran-backed Houthi rebels in Yemen claimed credit for the attack, but U.S. President Donald Trump and Secretary of State Mike Pompeo have already pointed the finger directly at Iran.
Trump, who said the U.S. is “locked and loaded depending on verification” that Iran staged the attack, earlier authorized the release of oil from the nation’s emergency reserves. The IEA, which helps coordinate industrialized countries’ emergency fuel stockpiles, said it was monitoring the situation.
“No matter whether it takes Saudi Arabia five days or a lot longer to get oil back into production, there is but one rational takeaway from this weekend’s drone attacks on the kingdom’s infrastructure — that infrastructure is highly vulnerable to attack, and the market has been persistently mispricing oil,” Ed Morse, Citigroup Inc.’s global head of commodities research, wrote in a note.
Brent jumped more than 19% to $71.95 a barrel on ICE Futures Europe, its biggest gain in percentage terms since 1991. In the ensuing hours, it pared that advance to trade up 9.5% at $65.92 a barrel as of 10:25 a.m. in London. The global benchmark crude could rise above $75 a barrel if the outage at Abqaiq lasts more than six weeks, Goldman Sachs Group Inc. said.
On the New York Mercantile Exchange, West Texas Intermediate futures were frozen for about two minutes after the scale of the move delayed the market open. When it finally started trading, WTI jumped more than 15% to $63.34 a barrel, the most since 2008. It was at $59.73 as of 10:26 a.m. London time.
The attacks “set the stage for a Monday-morning mini-massacre of any market participants holding short positions or bearish expectations,” said John Driscoll, chief strategist at JTD Energy Services Ltd. in Singapore. The “price move was exacerbated by the unprecedented magnitude of the outage on the world’s key supplier and the potential for escalation of geopolitical skirmishes involving the U.S., Saudi and Iran.”
The drama wasn’t limited to flat prices. The spread between Brent and WTI widened as much as 37%, showing that the oil spike will affect global prices more than those in the U.S., where shale output and ample supplies provide more of a buffer.
Brent’s six-month backwardation jumped to the highest level since September 2013 as the outage raised concerns about obtaining near-term supplies. And the call-put skew flipped into positive territory for the first time since 2018, indicating that options traders are willing to pay more to place a bet on prices rising rather than falling.
The federal government’s ambition to convert over 13 million Nigerian households to the use of Liquefied Petroleum Gas (LPG) for domestic purposes in five years, may suffer a setback due to controversy surrounding licensing of LPG skids for domestic purposes as well as for auto-gas. At a time when Nigeria is exploring opportunities to deepen the penetration of LPG in the country’s energy mix through the National LPG Expansion Plan and the National Gas policy with dedicated input for the enhancement of the LPG sub-sector, stakeholders in the value chain have allegedly identified inconsistencies in the DPR’s licensing procedure as a major obstacle to achieve the industry’s objectives. M&P Nigeria confirmed this allegation from a reliable source at the Petroleum Products Pricing Regulatory Agency (PPPRA) headquarters in Abuja, who informed this publication about a protest letter it received from LPG associations accusing the DPR of double standards in approving licenses for locating LPG skids at filling stations across the country. According to the source who preferred anonymity, the contentious issue started when the DPR issued directives for the closure of what it described as unapproved LPG skids for violating stipulated requirements for operating gas facilities in filling stations. He noted that the DPR based its actions primarily on the fact that licenses issued for the establishment of LPG skids as Add-On facilities at filling stations were designated as auto-gas and strictly for vehicular use, which must be in compliance with the new LPG guidelines. Auto-gas filling stations are filling stations that do not sell petrol, kerosene and diesel – but only sell gas to vehicles. The source, however, questioned the rationale behind the DPR’s premise that LPG skids at filling stations were designated strictly for vehicular use stating that there were too few auto conversion centres around the country, coupled with an absence of training for auto conversion expertise, a lack of incentives for vehicle owners to transit from petrol or diesel to LPG, as well as poor sensitization. He highlighted other issues affecting consumption of the product which include lack of competitive pricing which does not reflect the true state of the LPG market in Nigeria; as well as sourcing, pricing, supply and distribution bottlenecks which need to be removed through collaboration between stakeholders and regulators. On their part, LPG retailers reacting to the regulator’s claims accused its officials of being in a hurry to collect money to issue licenses only to turnaround and threaten to shut down their facilities and jeopardise their investment. Spokesman of Cooking Gas Skid Proprietors Association of Nigeria (CGSPAN), Otunba Shittu Moshood, said the clampdown by DPR could signal a death knell for the planned legislation aimed at compelling petroleum product marketers to set up gas filling plants in all filling stations across the country. On his part, President, Liquefied Petroleum Gas Retailers Association of Nigeria (LPGARAN), Mr. Chika Michael Umudu, said regulation and safety standards in the LPG sector cannot be compromised in anyway. He stated unflinching support for the sanitization of the sector but called on DPR to exercise restraint and take cognizance of the number of jobs being created in the LPG subsector, warning that a disruption in the activities of operators was capable of wiping out members’ huge investment and job growth target. The Agency did not respond to emails from our correspondent requesting information in this regard.
Nigerians may have to go through another fuel crisis soon should the Nigeria Union of Petroleum and Natural Gas Workers (NUPENG) go ahead with its threat of shutting down operation in the downstream sector in protest against the alleged violation of agreement with Chevron Nigeria Limited.
The union yesterday issued seven-day ultimatum to the management of Chevron to correct all the anomalies or face industrial action by the union.
Its President, William Akporeha, and General Secretary, Afolabi Olawale, said in a statement that the leadership of NUPENG would like to alert the public and all relevant authorities to the violation of agreement between Chevron Nigeria Limited Company and the unions in the industry.
“It is a public knowledge that the unions in the oil and gas industry had a protracted negotiation with Chevron Nigeria Limited on 70 per cent manpower reduction which they (Chevron) claimed was required in view of the so -called reduction in their operations in the Nigeria oil and gas Industry.
“The unions in the Industry (NUPENG and PENGASSAN) vehemently opposed this unpatriotic and inhumane move in view of the avowed commitment of the unions to the protection of jobs of our members and considering the high level of unemployment in the country which is directly responsible for the heightened insecurity and tensed situation in the country,” they said.
The union said the intervention of Nigerian National Petroleum Corporation (NNPC), National Petroleum Investment Management Services (NAPIMS) and Ministry of Labour led to the signing of the agreement after a year of negotiation. But lamented that Chevron started executing the exercise in blatant violation of the agreed terms and has already sacked 500 members of NUPENG, including its executives, an act the union said was done to put NUPENG in bad light or for its extinction as only the NUPENG members have been disengaged from work, leaving behind the non-unionised workers and PENGASSAN members.
“We further learnt that the intention of Chevron is to change the contract to short-term service contract and we see this as unfair and breach of agreement reached with us in bad faith”, the statement added.
The union, however, said the strike could only be averted if its sacked executives are reinstated, the percentage of reduction agreed spread to the three groups as agreed, to avoid creating the impression that NUPENG was the target of the exercise.
It warned that Chevron should not be allowed to use the exercise to change the labour manpower contract to service contract in a disguised manner.
It stated further: “Consequent on the above demand and having been pushed to the wall, NUPENG hereby puts all our members on red alert should Chevron and its contractors fail to honour or comply with our demands within the next seven days, we would also not hesitate to take all necessary legal options available to us; including industrial actions to press home our legitimate demands.”
