(The opinions expressed here are those of the author, a columnist for Reuters.)
* Graphic for attacks on Saudi oil: tmsnrt.rs/302z0Hm
By Clyde Russell
LAUNCESTON, Australia, Sept 19 (Reuters) - As the dust continues to settle from the weekend attacks on Saudi Arabia’s main oil processing facility, it’s worth noting the price reaction for physical crude told a somewhat different story to that of the futures market.
Commentary and analysis in the wake of the weekend strikes that knocked some 5.7 million barrels per day of production offline was concentrated on the 15% surge in global benchmark Brent futures, the biggest jump in more than 30 years.
There’s nothing wrong with this focus, as futures trading is where the market can most quickly express its collective fears, and the price spike was a rational response to the loss of almost 6% of global oil supplies and the risk of escalating military conflict in the Gulf region.
But what was interesting is that the price of physical oil cargoes in the region also surged, and by more than futures.
Dubai swaps for November jumped 16.4% on Sept. 16, the first trading day after the attacks.
This exceeded the 15.5% increase in the second-month Brent contract, which settles on Oct. 31, the same date as the Dubai swaps for November.
Looking further down the curve showed a similar dynamic with Dubai swaps for January gaining 13% in the wake of the attacks, while the equivalent Brent contract rose 12.7%.
These may not seem like massive differences, but the fact that physical crude prices rose by more than futures indicates a level of concern among the actual traders and consumers of crude oil that is somewhat higher than those investors in the paper market.
It’s also worth noting that in some prior incidents in the Gulf region, physical markets have been more relaxed than futures.
The attacks on two product tankers on June 13 in the Gulf of Oman, also blamed on Iran, saw second-month Brent futures gain 2.1%, while the equivalent Dubai swap rose a mild 0.5%.
This was because the investor market reacted more sharply to the attack on tankers near the Strait of Hormuz chokepoint, while physical players understood it was a move against product tankers, and not crude carriers, and was more likely intended as message rather than any actual attempt to disrupt crude shipments.
The same cannot be said of the weekend attacks on the Saudi oil facilities, which were aimed at causing maximum disruption to the crude market.
After the attacks caused the price of crude to surge on Sept. 16, prices retreated in the following days, but again the longer-dated physical market was less convinced than the futures market.
The January Brent contract lost 6.7% from its close on Sept. 16 to the finish on Wednesday, while the equivalent Dubai swap gave up 5.6%.
Again, a seemingly subtle difference that speaks to the physical market being more concerned that the paper market.
There may also be an element of scepticism among physical traders that Saudi Arabia can restore full production at its Abqaiq processing plant as quickly as it has indicated it will.
Saudi Energy Minister Prince Abdulaziz bin Salman told a news conference on Sept. 17 that the world’s top oil exporter would keep full oil supplies to customers this month, and that the kingdom would achieve more than 11 million bpd of capacity by the end of this month.
To this end, Saudi Aramco, the state-owned oil producer, has told at least six refiners in Asia that it will supply full allocations of crude volumes in October, although one has been told that some its crude will be of a different grade.
If the Saudis are able to provide their contracted level of oil exports to their major customers in Asia in October, and in subsequent months, it would be a remarkable achievement.
It’s likely that if this happens it will be as a result of using some stored crude and also by making very rapid repairs to the damaged facilities.
However, this also assumes no further escalation and attacks in the region, something that is far from guaranteed given widespread expectations that the Saudis, most likely in conjunction with their U.S. allies, will want to take action against Iran, which has been blamed for being behind the weekend attacks.
Editing by Jane Wardell