Today at 12:44 PM EDT, US crude oil prices declined 4.1%. Today, Reuters reported that Saudi Arabia plans to restore its oil production by early October. On September 14, a drone attack reduced Saudi Arabia’s oil production by 5.7 MMbpd (million barrels per day).
This reversal in oil production led to a surge of 14.3% in US crude oil prices on September 16. That day, Goldman Sachs estimated that if Saudi Arabia doesn’t restore its oil production in the next six weeks, Brent crude oil prices could reach $75.
President Donald Trump has not initiated military action in response to those attacks, which is another important factor in oil’s decline. Saudi Arabia is an important ally of the US in the Middle East.
On September 15, Trump tweeted, “Saudi Arabia oil supply was attacked. There is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom as to who they believe was the cause of this attack, and under what terms we would proceed!”
The Trump administration has already held Iran accountable for those attacks. Based on a Washington Post report, Pentagon officials advised Trump that further escalation could lead to a costly conflict. Moreover, the US has already imposed sanctions on Iran, which have hit the country’s economy hard.
On September 16, the Brent-WTI spread expanded by just 75 cents over the previous week. Brent is the benchmark for oil prices outside the US.
On December 7, 2018, OPEC-plus decided to implement a production cut of 1.2 MMbpd starting in January 2019. In that week, the Brent-WTI spread expanded by $1.28.
The drones attack on Saudi Arabia wiped out 5% of the world’s total oil supply. The small movement in the spread might suggest that traders anticipate that the oil market is well supplied even after the attack.
On September 16, with a double-digit rise in oil prices, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) rose 10.8%. Upstream stocks Chesapeake Energy (CHK) and Denbury Resources (DNR) rose 15.7% and 27.9%, respectively.
However, most of the oil producers hedge their output in advance. As a result, a short-term rise in prices might not boost investor sentiments. CHK has a greater affinity for oil prices. Plus, DNR operates with a production mix of more than 90% in oil.
Inventory data and crude oil prices
Today the API (American Petroleum Institute) plans to report its inventory data for the week ended September 13. The Reuters poll indicates a fall 2.3 MMbbls (million barrels) in the API report.
For the week ended September 6, the API reported a fall of 7.2 MMbbls, which exceeded Reuters’ estimated decline by 4.2 MMbbls.
On September 18, the EIA (US Energy Information Administration) is expected to report a decline of 2.9 MMbbls based on the Reuters poll. A fall in crude oil inventories could support US crude oil prices.