Abqaiq Attack And U.S. Crude Inventories: A New Risk Premium

Sep. 18, 2019 4:54 PM ETUSO, OIL-OLD, UCO, SCO, BNO, DBO, DTO, USL, OLO-OLD, SZOXF, OLEM, OILK, OILX7 Comments
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Prime Value
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Summary

  • KSA export policy remains very aggressive.
  • Extremely low imports have wiped out 69MM barrels since June.
  • US growth production may surprise to the downside.
  • Supply loss from KSA may deplete all of their inventories.
  • Going forward, we expect US crude storage to finish at its 10y average by the end of the year.

Kingdom of Saudi Arabia: Whatever it takes

Last time we wrote about US crude inventories, we explained how serious KSA was about bringing the oil market to balance. Please see our previous article for reference.

Not only KSA, but also Venezuela and Iraq. See below:

Source: Author based on EIA

As a result, the crude draw since the start of June has been the steepest on record, more than 69MM barrels of crude:

Source: Author based on EIA

US oil market cannot rely in other countries to offset losses that come from KSA and Iraq:

Source: Author based on EIA

However, the US market is not balanced yet. Despite the fact that we've seen much lower net imports so far, average prices in 2019 were well below the KSA target. An unusually low US refinery throughput and an extremely high adjustment factor explain to a large extent the huge surplus we saw in H1 2019:

Source: Author based on EIA, Bloomberg

Low prices could be the reason why Khalid Al-Falih is no longer the Saudi energy minister. He has been replaced by Prince Abdulaziz bin Salman, the son of Saudi Arabia’s King Salman bin Abdulaziz.

Al-Falih didn't do a good job boosting oil prices. That was critical to the timing of the Aramco IPO (its internal current valuation is about $2T). Therefore, KSA understands that in order for the valuation to go up, they need higher prices for longer.

Ironically, KSA measures were quite effective as we've seen above. We firmly believe their goal is to reduce stocks to the 10Y average or lower, where historically one could see much higher prices:

Source: Author based on EIA

Shale Oil Signaling A Possible Slowdown

There are several reasons to be suspicious about the US growth production:

  • Since May 2018, legacy loss is

This article was written by

Prime Value profile picture
273 Followers
Value investor with contrarian bias, preferably towards small companies with predictable cash flows and good management. We used to contribute as "Dhandho Investor" and now we'll be contributing under Prime Value.

Disclosure: I am/we are long GENGF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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