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Oil prices could go higher if there’s a military escalation

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An employee walks past crude oil storage tanks at the Juaymah Tank Farm in Saudi Aramco’s Ras Tanura oil refinery and oil terminal in Ras Tanura, Saudi Arabia, on Monday, Oct. 1, 2018.

Simon Dawson | Bloomberg | Getty Images

The growth of the U.S. as both oil producer and exporter is helping cap a spike in crude prices following attacks on Saudi Arabian oil facilities, but the price could go sharply higher, depending on the duration of the disruption and whether it escalates into a military conflict.

The weekend attack on the Saudi Aramco’s Abqaiq processing facility and another plant knocked 5.7 million barrels of Saudi production off line and underscores a new realization of vulnerability in world oil production. That is 5% of global oil output and about half of Saudi’s production, but Saudi Arabia has sufficient supplies to maintain its current export level for about a month.

Oil prices initially spiked nearly 20% in trading Sunday evening but were up just about 14.5% in U.S. trading Monday, the biggest one-day move since Feburary, 2016. Brent was trading at $68.45 per barrel in late trading.

“What the market is pricing is geopolitical risk premium and tail risk. Something like this has never happened before. There have been attempts but those were foiled,” said Amarpreet Singh, Barclays energy analyst. “Something like this to Saudi supply has absolutely never happened, even during the Gulf War.”

Houthi rebels, aligned with Iran, claimed responsibility for the attack, but Secretary of State Mike Pompeo said Iran was responsible.

Saudi Arabia’s foreign ministry said an investigation into the incident shows Iranian weapons were used in the attack. President Donald Trump presided over a national security meeting at the White House Monday morning on the topic of Iran, NBC News reported from sources.

Trump told reporters Monday afternoon that he was in no rush to respond to the attacks on Saudi oil facilities.

“The more we have coming from Washington and Riyadh implicating the Iranians in this attack, there may be more pressure for Washington to back words with action,” said Helima Croft, head of global commodities research. “This is one of the most strategically important energy facilities in the world. If you do nothing, are you essentially green lighting more attacks. At what point, do you need to show some deterrence?”

Iranian President Hassan Rouhani said, at a press briefing Monday, that the attack was self-defense by Houthis and a retaliatory response for Saudi attacks on Yemen.

The attack on Aramco facilities was highly sophisticated and targeted the critical processing plants that help reduce hyrdrogen sulfur in crude. There have been numerous other attacks on Saudi Arabia, as well as on oil tankers, but none has done such extensive damage.

Analysts at Goldman Sachs said a lengthier outage could result in a sharp jump in crude prices. For instance, if the current level of production remained down for more than six weeks, there could be a quick rally in Brent to $75 per barrel, they said in a note. Brent is the international bench mark and traditionally has been more sensitive to events in the middle east.

Singh said Brent could reach $75 if the outage is extended, and in about three weeks the Saudi oil supplies would begin to run low. “If it takes that long you’ll really start seeing another leg up,” he said.

The Barclays analyst said the market has been responding to the worries of slowing economic activity from the trade war, and he said the market was already heading towards a deficit.

“What’s incremental [for oil prices] is this attack and what’s unknown is how long it’s going to take to restore production. The other unknown is what kind of escalation is going to happen here,” he said.

But oil could go even higher, depending on whether there are further attacks or a military response from Saudi Arabia, the U.S. or others. “If this escalates into a hot war, you’re looking on a $100 oil,” said John Kilduff of Again Capital.

He noted that Saudi Arabia is calling on the United Nations to investigate the attacks.

“You don’t get the sense there’s a rush to war, as spectacular as this attack was,” said Kilduff. 

For now, both U.S. West Texas Intermediate and Brent futures are trading at levels last seen in May, and have broken slightly above a range they were trapped in all summer. WTI futures settled up 14.8% at $62.90 per barrel, its best day since December, 2008.

Croft said Brent could get back to this year’s high of $75.60, and in the event of an escalation, it could reach its October, 2018 high of $86.74 per barrel. “$85 is the new $100,” said Croft. “What’s changed is you now have this resource in the U.S.”

A conflict in the Middle East could have driven oil to $200 a barrel five years ago. “If you add a war to this, maybe you would have $100,” she said.

The pressure is also on Saudi Arabia Crown Prince Mohammed bin Salman to take action. The prince, known as MBS, is in charge of Saudi Arabia’s military and leads the war in Yemen. He also is driving the kingdom’s diversification effort away from oil. The anticipated initial public offering of Aramco is a big part of that effort though some analysts said it may now be delayed.

“If they don’t do anything, they’re going to look really weak,” said Kilduff.

Croft, in an earlier note, said MBS has shown more willingness to confront the Iranians and their proxies than previous Saudi leaders.

“At a minimum, we would expect to see stepped-up Saudi bombings on Houthi targets in Yemen, but one cannot rule out a more direct retaliation on Iran if the attacks continue at the current pace,” she noted.

The U.S. said it would consider tapping its strategic oil reserves to make up for lost supply, but U.S. Energy Secretary Rick Perry said it would be premature to do so at this point.

Analysts have already been expecting the U.S. to add more export capacity. Pipelines to take crude from the Permian basin to the Gulf Coast have just come on line, and more are to follow.

According to Citigroup, the new pipelines could help grow U.S. oil exports from the current 3 million barrels a day by 1 million barrels more by year-end and another million barrels next year. Exports have already grown by an average 970,00 barrels a day this year over last year, according to Citigroup.

The U.S. is currently importing very little Saudi oil, and imports now are about 500,000 barrels a day.

“There’s actually a silver lining, if you will, to this story in the sense that had this happened five year ago, it could have absolutely brought the global economy to its knees. Today, we’re concerned about it. We need to address it, but it’s not anywhere near as devastating as it would have been five years ago,” Energy Secretary Rick Perry told CNBC.

According to Energy Department weekly data, the U.S. produced about 12.4 million barrels a day, and exported about 3.3 million barrels a day earlier this month. The U.S. was a net importer of about 3.4 million barrels of crude.

The U.S. in the past year has become the world’s largest oil producer, ahead of both Saudi Arabia and Russia. OPEC and Russia have had an agreement to reduce production in an attempt to prop up world oil prices, which have been soft on worries about weakening demand growth.

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Hit China with new tariffs or hold off?

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U.S. President Donald Trump poses for a photo with China’s President Xi Jinping before their bilateral meeting during the G20 leaders summit in Osaka, Japan, June 29, 2019.

Kevin Lamarque | Reuters

In this multifront, multiyear trade war, with shifting deadlines and political headwinds, it has paid for investors to beware the ides of March. May. August. October. And now, December.

In less than two weeks, President Donald Trump must decide whether to slap tariffs on $156 billion in consumer goods made in China — including toys, phones, laptops and clothes, right before the holidays — or move the goal post yet again in lieu of the comprehensive trade deal he’s been seeking.

“If enough substantive progress had been made, he might” be willing to delay, Commerce Secretary Wilbur Ross told CNBC this week. Treasury Secretary Steven Mnuchin said Thursday the two sides were still “on track,” for a deal and still talking, but he did not say whether the tariffs would be shelved.

During the Oval Office announcement of the latest truce, Mnuchin assured the public there would be more than enough time to finish the deal and permanently avert further tariffs.

That was two months ago.

Trump now has a complicated calculus to consider: Postponing the tariffs would avoid a market sell-off and higher holiday prices — and the ire of CEOs like Tim Cook and Jamie Dimon whom Trump has come to not only trust but revere. But doing so with anything short of a deal-signing — which Trump said in October was the next step — would mark the fifth instance this year that he delayed or canceled tariffs as a gesture of goodwill, further exposing him to criticism that the “phase one” deal exists only as a talking point.

Enacting the tariffs would cause its own problems. Republicans and Democrats alike would worry the White House was gambling with a U.S. economy already seeing some cracks in its strength. American farmers, many in swing states, would see exports further shrink and endure deeper financial suffering, not to mention continued retaliation.

Washington doublespeak

And Chinese negotiators, already frustrated with Washington doublespeak and insisting that tariffs be removed would likely walk from negotiations, says Stephen Myrow, managing partner at Beacon Policy Advisors.

“Most people around President Trump are telling him that’s a big risk,” the former Treasury official told CNBC. “Throwing everything on right now would be a pretty big political miscalculation.”

Dan DiMicco, a former steel executive who shares Trump’s propensity for tariffs and often shares trade advice with him, said the president will win in either outcome.

“Going into this date, President Trump has a lot of latitude depending on where the talks are really at, which no one outside of him and his team know,” DiMicco said. “He really is in a no-lose situation.”

Since the October truce, information about the state of talks has been nearly impossible to glean. U.S. readouts of principal-level calls stopped in early November, leaving interested parties to rely on information funneled to Chinese state media.

U.S. officials have used phrases like “short strokes” and “millimeters away” to emphasize that a deal is in the home stretch — without indicating what, exactly, is left to negotiate of the deal that was announced as complete on Oct. 11.

Larry Kudlow, the president’s top economic advisor, said Friday that there are a “few buttons that have to be buttoned” to wrap up talks, but acknowledged that there could be a watershed mid-month.

“The fact remains that Dec. 15 is a very important date with respect to a ‘go,’ or a ‘no-go,'” Kudlow said on Squawk on the Street.

And Trump has given mixed signals about his inclination to do a deal: Within the space of one day this week, he suggested a deal could be more than a year away, then after a 400-point market sell-off, he suggested the talks were going well.

Dan Clifton of Strategas Research Partners says Trump stands to benefit politically if a deal is reached in the near-term that solves a limited number of low-hanging issues, like rolling back tariffs and restoring export markets. American incomes would rise – and the manufacturing- and ag-heavy states would see their fortunes reverse.

“Not coincidentally, these are the states Trump needs to win the most in the electoral college,” Clifton tells CNBC.

Positive signs emerging

Business groups have leaned on their executive members to provide dispatches from the ground. Anna Ashton, director of business advisory at the US-China Business Council, says positive signs have been emerging.

“We hear from both sides that the negotiators are close to a deal, so there is reason for optimism that we will not see new tariffs this month,” Ashton said. “But as you know, they’ve been close to a deal before, only to have intractable differences resurface.”

Officials have acknowledged the pain this particular round of tariffs could exact on the U.S. economy. Originally set to go into effect Sept. 1, White House officials urged Trump to delay them to limit the economic impact going into the Christmas season. They are now set for Dec. 15.

The list includes items that were excluded from prior tariffs primarily because of a potential impact on consumers and voters. In May, Mnuchin told lawmakers that the U.S. economy had been largely insulated from the tariffs because of this structure but acknowledged that would change if the goods in the December list were hit by tariffs.

“The way these tariffs were designed was, the last tranche is really the consumer issue,” Mnuchin told the House Financial Services Committee. “The last tranche is subject to the president’s approval.”

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Oil rises as OPEC and allies announce deep production cut

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Oil moved higher on Friday as OPEC and its allies agreed to deepen oil production cuts to 500,000 barrels a day through to March 2020. This brings the total production cut to 1.7 million barrels a day.

U.S. West Texas Intermediate crude futures gained 1.2% to trade at $59.13 a barrel. Brent gained 1.5% to trade at $64.31 a barrel.

Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman told reporters on Friday that the oil-rich kingdom’s quota would be an additional 167,000 barrels per day. He also said that the kingdom would continue to exceed its quota by 400,000 barrels a day, which means the overall production cut will actually be closer to 2.1 million barrels a day.

The country is OPEC’s de facto leader, and has been adamant that those who were previously overproducing — such as Iraq and Nigeria — comply with the group’s quota. Prince Abdulaziz bin Salman said that the country’s additional and voluntary cut would be contingent on other countries abiding by their allocation.

Russian Energy Minister Alexander Novak said Moscow’s quota would be 300,000 b/d during the first three months of 2020. This measurement excludes gas condensate — a high-value light crude extracted as a by-product of gas production.

The energy alliance said it plans to review the policy at an extraordinary meeting on March 5-6.

Ahead of the decision

On Thursday the 14-member cartel, as well as its allies, which is known as OPEC+ and includes Russia, agreed in principle to reduce output by an additional 500,000 barrels per day.

But as day two of meetings in Vienna kicked off Friday, there were still many questions, including how the quota would be allocated, and how long the agreement would stretch for. Friday’s meeting followed a tumultuous and marathon session Thursday. Talks stretched on for hours, and the customary press conference held after the meeting wraps was abruptly cancelled.

The duration of the deal was one of the key unknowns. On Friday OPEC said it would meet again on March 5-6. The cartel typically meets every six months, so the announcement had led some on the Street to believe the increased cut would only extend through the first quarter.

“It remains unclear what would occur in 2Q20, potentially reflecting Saudi’s new stance that they could walk away from this deal if other countries did not comply fully,” Goldman Sachs analyst Damien Courvalin said in a note to clients Thursday.

Another key factor was compliance. Currently several members including Iraq, Nigeria and Russia are over-producing. Saudi Arabia, on the other hand, exceeds its current target cut, and signaled ahead of OPEC’s meeting that stricter rules should be implemented.

“The Saudi message is compliance,” Mizuho managing director Paul Sankey said in a note to clients Friday.

The deeper-than-expected cut might not have all that much of an impact on oil prices, however, since ahead of Thursday’s meeting OPEC+, as a whole, was not even pumping as much as allotted.

“While we await full details from OPEC and non-OPEC, we think a 0.5MMbls/d announced cut relative to existing quotas is just enough to keep markets balanced for 2020,” Bernstein analyst Neil Beveridge said Friday. “Overall, a satisfactory outcome but investors will likely want to see evidence cuts are being delivered before getting too excited.”

Russia had also reportedly asked that condensates no longer be quoted as part of output for countries, a move which would reduce the total impact of the cuts.

“Everyone’s starting to do math. Between the condi [condensates] exemption and the current rate of over compliance, it’s not really a new larger cut,” Again Capital’s John Kilduff said to CNBC Thursday.

– CNBC’s Brian Sullivan, Patti Domm, Michael Bloom and Sam Meredith contributed reporting.

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Saudi energy minister Prince Abdulaziz defends US shale producers

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Saudi Energy minister Prince Abdulaziz bin Salman shakes hands with staff during his visit to an Aramco oil facility one day after the attacks in Abqaiq, Saudi Arabia September 15, 2019.

Saudi Press Agency | Reuters

Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman played down any rivalry between U.S. shale producers and more established oil producers in the Middle East.

Speaking to CNBC’s Hadley Gamble following an OPEC decision in Vienna, Austria, on Friday, Abdulaziz said: “They (U.S. shale producers) didn’t do anything wrong, they produced more barrels, they put the U.S. on the map in terms of its energy requirements, they are growing the economy, they are creating jobs.”

The U.S. is now the world’s largest oil producer hitting 12.3 million b/d in 2019, according to the U.S. Energy Information Administration, up from 11 million b/d in 2018. It now produces more oil than Saudi Arabia and Russia, although there are signs that production growth is slowing in the States.

Due to the boom in U.S. shale production, alongside other factors, the OPEC energy alliance was prompted to act after global oil prices tumbled in mid-2014. U.S. shale producers were not part of that deal and shale oil supply grew exponentially as OPEC producers curbed output.

“They did a remarkable job,” Abdulaziz told CNBC regarding the U.S. energy industry. He spoke of “legal limitations” when asked whether there could be pact with shale producers in the future, but said that Saudi Aramco — his country’s state-owned oil firm — “would go more and more international.”

In May, Aramco signed an agreement to buy U.S. liquefied natural gas from San Diego-based utility Sempra Energy, which helped to advance its ambitions to become a player in the growing international gas market.

Rampant shale supply and faltering demand due to a global economic slowdown have threatened to unbalance oil supply and demand dynamics. OPEC and non-OPEC allies, often referred to as OPEC+, decided on Friday to implement even tighter oil production policy at the biannual meeting in Vienna.

The new deal, which is much larger than many analysts had expected, will see OPEC+ reduce total oil output by 1.7 million b/d. However, Abdulaziz told reporters on Friday that his country — the de facto leader of OPEC — would also extend a voluntary cut of 400,000 b/d, saying that the energy alliance’s total cuts would effectively amount to 2.1 million b/d.

—CNBC’s Sam Meredith and Holly Ellyatt contributed to this report.

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