Saudi oil production under attack

Saudi Arabia has temporarily lost 5.7mb/d of oil output following drone attacks on Saturday.
This amounts to 5% of world output and is a significant blow to the oil market.
Reports suggest Saudis can recover a large part of the lost oil within days, but may need weeks to return to full capacity.

Jens Nærvig Pedersen Danske Bank A/S

The world's biggest crude production facility in Abqaiq and Saudi Arabia's second-biggest production facility in Khurais suffered drone attacks on Saturday. Consequently, Saudi Arabia has temporarily lost 5.7mb/d of crude output. Reports suggest that Saudi Aramco, the state oil company, can resume a significant part of the lost production volume within days, but may need weeks to return to full capacity.

Albeit likely only temporarily, the oil market will struggle to cope with a 5% output loss. Most of Saudi Arabia's crude exports go to the US, China, Japan and South Korea. All four countries hold significant strategic oil reserves, which can fill a temporary gap in crude supplies. On a global scale, we expect weak demand, due to slowing economic growth and the ramifications of the trade war, will act as a mitigating factor. Recently, OPEC+ voiced concerns about a growing oil supply surplus.

The output loss amounts to around 5% of total world crude output. Even if it turns out to be only a temporary output loss, we see it as a significant blow to the oil market in several ways. Firstly, the oil market is used to output disruptions, but nothing of the magnitude witnessed in Saudi Arabia over the weekend. For example, disruptions in Libya due to rebel attacks are normally 200-300kb/d. Secondly, Saudi Arabia normally holds some spare production capacity, which it can deploy when output is disrupted elsewhere in the oil market. The market knows this, which means it tends not to overreact to supply disruptions. After this weekend, the market may be more hesitant in trusting this self-stabilising mechanism. Thirdly, the market is used to geopolitical tensions in the Middle East. Besides the effect of outside sanctions, it is rare that they affect oil production. The oil market may become more averse to geopolitical news going forward.

Over the coming days, we expect the market to focus on the immediate impact on Saudi Arabia's oil production and geopolitical tensions in the region. This will set the direction for oil prices. However, over the coming months, we will keep an eye on whether this weekend's attack has implications for OPEC+, which is set to meet again on 5 December. Saudi Arabia has been overly compliant in adhering to its part of the OPEC+ deal to cut oil production. It may be less willing to continue this position.

Download The Full Flash Comment

Author

Jens Nærvig Pedersen

Danske Bank A/S

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.