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The Oil Crisis Saudi Arabia Can’t Solve

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Saudi Arabia’s CEO Amin Nasr’s message to the press that oil flows to the market are guaranteed, should be taken with a pinch of salt.

Looking at the current volatility in the Persian/Arabian Gulf and the possibility of a temporary closure of the Strait of Hormuz, the Aramco CEO’s message might be a bit overoptimistic. In reality, Aramco will not be able to keep the necessary crude oil and products volumes flowing to Asian and European markets in the case of a full Strait of Hormuz blockade. Even that Aramco owns and operates a crude oil pipeline with a capacity of 5 million bpd, carrying crude 1,200 kilometers between the Arabian Gulf and Red Sea, much more is needed to keep the oil market stable.

Nasr’s move to stabilize the market is praiseworthy but should be seen as an attempt to quell fears of traders and financial analysts, especially just before the OPEC+ meeting in Vienna next week. Nasr reiterated that Aramco (aka the Kingdom) is able to supply sufficient crude through the Red Sea, reiterating that the necessary pipeline and terminal infrastructure is there. However, what analysts tend to forget, Nasr’s statement is only linked to Saudi’s oil export volumes, which will likely be not higher this summer than around the level this pipeline can support. The real issue, if it comes to a full-blown conflict, is that not only Saudi oil is being threatened.

At present, between 20-21 million bpd of crude and petroleum products are transported via the Strait of Hormuz. Saudi exports are a vast part of it, but also the UAE, Iraq, Kuwait, Bahrain, Qatar and Iran, will have to look at additional routes. A closure or military action in the region will cause a temporary disruption for all maritime traffic. Besides the options that are the already on the table, such as the Saudi onshore pipeline and the UAE’s Fujairah pipeline,  no other real alternatives are available, as overland trucking or rail transport is minimal. Transferring volumes via the Saudi and UAE’s pipelines is not an option at all, as the total capacity of the two is less than 10 million bpd, representing not even 50% of the current maritime flows through Hormuz. Another thing that should be noted is that pipelines can’t ship crude and crude products at the same time.

 

Another consequence of a blockade would be that most available VLCCs and other tankers will either be in the Persian Gulf (and blocked) or will not be able to be rerouted. Before the market will have found a solution for this, days and probably weeks will have gone by, and a price spike for all products is to be expected.  This will likely also be the case for LNG and other commodity flows.

Few analysts are talking about oilfield security and pipeline availability. Any military advisor will put these options as part of his or her 1st phase military action plan. If Iran were to be attacked, or faces a surgical strike by an opponent, all Arab oil and gas infrastructure will become a legitimate offensive target (at least in the eyes of Tehran and its proxies). Geographically seen, Tehran has been dealt the best cards. Looking at the majority of oil and gas production assets and infrastructure in the Arab world, especially in Saudi Arabia, UAE or even Iraq, everything is in reach of short-distance missiles, fighter jets and even drones. Any move against Iran will result in a full-scale attack on Saudi’s Eastern Province (which produces 80% of all its oil and gas), Abu Dhabi’s offshore oil infrastructure and the regional pipelines. Looking at history, denying energy access and diminishing the opponents stability is a no-brainer in military strategy.

It can be taken for granted that Iran, the Houthis, Hezbollah and others, already have prepared their oil and gas infrastructure strategy. Washington, Riyadh, Abu Dhabi and even Manama, will be frantically looking for answers, but the geographical situation is disastrous.

Quelling fears in the market is the right thing to do, but reality also needs to be addressed. Nasr’s message is that of an oil company CEO, taking all precautions to deal with a calamity. ADNOC’s Sultan will be doing the same. Still, the oil market is at present a victim of geopolitical power projections of emotional leaders superseding rationality. This confrontation is one of a possibly unprecedented order, not for oil (as sceptics again will state) but with oil as a weapon for defeat or survival. The continuing reference to the Iran-Iraq tanker war during 1980-1988 is out of touch with reality. At this time, it is not going to be Iran denying support or trade with Iraq, but a possible Arab-Iranian confrontation, led by the USA if no countermeasures are being implemented.

Asian consumers will need to prepare for severe price hikes in the most optimistic scenario, but also for a shutdown of vast parts of their economy. Hormuz will not be standing on its own, more is to be taken into account, especially proxy reactions in Yemen (Gulf of Aden) or East Med (Hezbollah).  Negative repercussions for Europeans are also in the picture. Saudi Arabia can do a lot, but saving the global economy if the Gulf explodes is not one of their capabilities.

By Cyril Widdershoven for Oilprice.com



8 Comments on "The Oil Crisis Saudi Arabia Can’t Solve"

  1. joe on Sun, 30th Jun 2019 8:26 am 

    If Iran can knock out a US best standard globalhawk without much trouble, how easy it will be for the Iranians to pin point an immovable object like a pipeline. Lets not be stupid. If Iran is going down, they ain’t gonna let the real cause of their troubles get off easy. With Syria hanging on, and Saudi/UAE army of mercs in Yemen kicking back and suckling brewskis the there is many places left not in Iran that Iran could launch a missile from. Hell there’s even parts of Pakistan/Afghanistan that have friends of Persia in them. Persians have historically been respected as traders and cultured people who more often make more friends than enemies. War with Iran is not the same as war with Iraq, or Afghanistan. The Taliban still feild an army against the US yet Bolton wants to widen Americas commitment. The Syria war is a clear defeat for US interests yet Bolton wants to widen the war…..

  2. Sissyfuss on Sun, 30th Jun 2019 10:14 am 

    All these complex scenarios playing out in regards to Irans next move are a result of Trumpledforeskins hatred of all things Obama. A rapid increase in oils price would bring down the Potemkin village that is the US economy. Pubic hair head may seem goofy and innocuous but he is the greatest danger to world peace since the Austrian. The unread narcissist has no depth and like Reagan, tells people what they want to hear as he facilitates his completely different policies. He being president is merely another symptom of the Long Emergency and the deepening entrance into bottleneck. Enjoy the show.

  3. Cloggie on Sun, 30th Jun 2019 12:41 pm 

    Ottoman Empire 2.0 latest:

    https://www.bbc.com/news/world-europe-48818695

    “Turkey vows ‘heavy’ retaliation to Libya attacks, defence minister says”

    Turkey says it will “retaliate in the most effective and strong way” to any threats from the Libyan warlord’s Khalifa Haftar’s army.

    He said Turkish backing helped “rebalance” the fight against Gen Haftar, who has backing from UAE and Egypt.

    Of course, UAE and Egypt are code words for America.

    More signs that Turkey is quietly distancing itself from the US geopolitically.

  4. I AM THE MOB on Sun, 30th Jun 2019 12:45 pm 

    Proud Boy, “Andy Ngo”, milkshaked after trying to fuck with Antifa
    https://i.redd.it/dtr3nge96j731.jpg

    lol

  5. JuanP on Sun, 30th Jun 2019 12:49 pm 

    I AM THE MOB you need a milkshake up your ass

  6. Robert Inget on Wed, 3rd Jul 2019 8:15 am 

    The Art Of War
    July 2, 2019

    |

    Khalid Al-Falih, OPEC Minister

    “I have no doubt in my mind that U.S. shale will peak, plateau and then decline like every other basin in history,” Al-Falih told reporters at OPEC’s Vienna headquarters. “Until it does I think it’s prudent for those of us who have a lot at stake, and also for us who want to protect the global economy and provide visibility going forward, to keep adjusting to it.”

    Translation: ‘OPEC intends to cut it’s oil production levels and keep worldwide oil prices ‘just’ high enough to allow the US shale oil industry to drill itself into almost total depletion while getting deeper and deeper in debt. For those in the world who think we are stupid in the Middle East, that is not true. We see that the Permian Basin, itself almost a desert, will carry the brunt of America’s shale oil growth and are stunned at the decline rates of those wells and the number of new ones it takes every year just to maintain current production levels. Where is all that water, and all that money coming from? It is totally baffling to us how Americans cannot control their spending habits and not want to conserve some of their oil resources for the future, like we are at OPEC.

    We intend to “adjust” to American shale oil until it is mostly all gone, then we at OPEC will be able to name our own oil price. Like the Chinese dude, Tzu, once said…”When your enemy is in the process of destroying itself, stay out of its way.” ‘

  7. Robert Inget on Wed, 3rd Jul 2019 8:32 am 

    Above:
    All ya need to know bout the current state of world crude oil supplies.

    I would offer one slight correction.
    The OPEC ‘experience’ over the last 65 years was NOT one of careful management but exploitation
    of the peoples resources for a tiny minority.

    NO-PEC Russia is THE perfect example of ripping off that population.

    Of the truly Democratic nations ONLY Norway
    shows good management.

    The US has No Energy Policy. Of this fact we will become painfully aware.

  8. Robert Inget on Wed, 3rd Jul 2019 9:57 am 

    The take-away from last week’s EIA storage repore; CONSUMPTION Unchanged from last year. Reason: a huge fire took out one of the largest, oldest, refineries in the NE. It will Not be rebuilt. (that’s big news)

    Unchanged consumption does indicate a slight slowdown. Credit all electric and hybrid EV’s.

    Next two weeks should show draws about the same as today’s.

    Summary of Weekly Petroleum Data for the week ending June 28, 2019

    U.S. crude oil refinery inputs averaged 17.3 million barrels per day during the week ending June 28, 2019, which was 47,000 barrels per day less than the previous week’s average. Refineries operated at 94.2% of their operable capacity last week. Gasoline production decreased last week, averaging 9.9 million barrels per day. Distillate fuel production increased last week, averaging 5.3 million barrels per day.

    U.S. crude oil imports averaged 7.6 million barrels per day last week, up by 929,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged about 7.3 million barrels per day, 13.1% less than the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 536,000 barrels per day, and distillate fuel imports averaged 98,000 barrels per day.

    U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 1.1 million barrels from the previous week. At 468.5 million barrels, U.S. crude oil inventories are about 5% above the five year average for this time of year. Total motor gasoline inventories decreased by 1.6 million barrels last week and are at the five year average for this time of year. Finished gasoline and blending components inventories both decreased last week. Distillate fuel inventories increased by 1.4 million barrels last week and are about 6% below the five year average for this time of year. Propane/propylene inventories increased by 1.3 million barrels last week and are about 11% above the five year average for this time of year. Total commercial petroleum inventories increased last week by 2.5 million barrels last week.

    Total products supplied over the last four-week period averaged 20.9 million barrels per day, virtually unchanged from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 9.7 million barrels per day, down by 0.1% from the same period last year. Distillate fuel product supplied averaged 4.1 million barrels per day over the past four weeks, up by 1.6% from the same period last year. Jet fuel product supplied was up 2.2% compared with the same four-week period last year.

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