Oil prices fall on restored output but risks linger

This calmed market fears over the ability of Saudi Arabia and the oil market at large to compensate for the significant supply deficit


THE rally in the crude oil market was short-lived as prices fell as much as 7% since Monday after Saudi Arabia said it restored half of its lost output, but the risk of further attacks on oil infrastructure in the Middle East should see oil continues to trade at a premium.

Saudi Arabia Energy Minister Prince Abdulaziz Salman announced on Tuesday that the country recovered 50% of its disrupted oil supply after attacks on key Saudi Arabian oil facilities took 5.7 million barrels of daily production offline.

The newly named energy minister added that the kingdom’s crude production could return to normal as soon as the end of this month.

This calmed market fears over the ability of Saudi Arabia and the oil market at large to compensate for the significant supply deficit, which represents more than 5% of global daily oil output, while sending crude oil prices lower.

Brent oil futures traded above the US$64 (RM267.52) per barrel level at the time of writing, representing a decline of 7% from Monday’s close of US$69 per barrel, but oil prices are expected to be volatile due to geopolitical risks.

Oanda Corp senior market analyst for Asia Pacific Jeffrey Halley said it remains unclear how future attacks on oil infrastructure in Saudi Arabia and the region will be prevented.

“The spectre of military retaliation still looms over any accused of the attacks, and for these reasons, intraday volatility aside, a risk premium of a few percent will remain built into oil’s pricing,” he said in a research note yesterday.

He noted that oil is trading on event-driven headlines and will likely stay that way for some time, ignoring fundamentals like the higher than expected American Petroleum Institute’s (API) crude inventories.

AxiTrader Asia Pacific market strategist Stephen Innes said Saudi Arabia restoring production — while likely to placate global investors’ immediate economic concerns — is only half the problem as the attacks exposed some significant vulnerabilities.

“None more so than just how inadequately prepared the markets are for disruptions of this magnitude, which suggest the supply risk premium could stick around well after production is restored,” he said in a research note yesterday.

He added that latest intelligence reports suggest the attack on Saudi Arabia’s oil sites was a result of a series of low-altitude cruise missiles fired from at least one location in Iran.

“Indeed, if fully verified, it suggests that there are very sophisticated and well-funded operators at work in the Middle East terrorist theatre, also implying risk premium could linger. After all, the Middle East powder keg is but a spark away from igniting.”

Yemen’s Houthi rebels claimed responsibility for the attack on the Saudi Arabia’s critical oil sites, warning the kingdom their targets will continue to expand.

The supply disruption in Saudi Arabia is believed to be the worst in the history of oil market, exceeding the supply losses noted during Iraq’s invasion of Kuwait back in August 1990, and in 1979 during the Islamic Revolution in Iran.

This caused Brent futures to spike 19.5% to US$71.95 per barrel seconds after trading commenced on Monday — the highest intraday jump on record since the contract was first launched back in 1988.

While paring most of its gains, crude oil trading at a premium is an immediate boon to net oil exporters such as Malaysia, but the larger concern is the impact of what a major oil supply disruption would mean for the world economy.

Malaysia’s federal government based its 2019 budget on an average Brent of US$70 per barrel. However, Brent oil is currently averaging at US$65 per barrel for the year.

It is estimated that every US$1 per barrel dip from this level will result in a RM300 million revenue loss for the government, though the inverse is also true.

Meanwhile, Malaysian oil and gas (O&G) stocks pared back their gains after the spike in oil prices saw investors mopping up energy-related counters on Tuesday.

Hibiscus Petroleum Bhd, a direct proxy to oil prices as a pure play exploration and production (E&P) player, closed 2.5 sen or 2.45% lower at 99.5 sen yesterday as 15.34 million shares exchanged hands.

Sapura Energy Bhd, which is engaged as both an E&P player and an O&G service provider, closed 1.69% lower at 29 sen.

O&G service providers Dayang Enterprise Holdings Bhd, Uzma Bhd, Carimin Petroleum Bhd and Velesto Energy Bhd also ended the day in the red.