What a week (+) it has been!1- Saudi Arabia oil minister is suddenly replaced.
2- Trump fires Bolton as he does not agree with his tough stance on Iran and North Korea.
3- Trump seriously considers lowering sanctions to meet with Rouhani at UN assembly on September 23.
4- OPEC meeting where we hear about status quo for now on production and drop in demand forecast.
5- IEA as usual throws cold water on oil with talks of massive glut in 2020.
6- Drones attack 2 facilities in Saudi Arabia and take out 50% of production: almost 1.5 times Canada, almost all of U.S. shale.
A few things should determine what happens next to oil and I am sure I am missing some:
1- Time to recovery: In 2018, Syncrude went down for around 3 months following blow-up of the main power transformer. Tar turned solid into their process and had to empty it all out. Now, we are talking about a much larger facility that has been bombed in various random areas with very visible fires (from space) and we are supposed to believe that it will come back fully on line within a few days?
Think about pumps, specialized tanks, pipes of various sizes, valves, electric cables, access ramps, measuring equipment, all burned down. First, you have to remove all that stuff, then get various specialized crews to reassemble all of that to spec with some of the equipment that may not be available at all on the shelf until manufactured.
2- Retaliation: Forgiveness does not exist in the Arab dictionary. It is very likely that we will see air bombings in Yemen next. Senator Graham in the U.S. now suggest that bombing Iranian petrochemical facilities should be considered!
It is very hard to know what will happen next but, what we are witnessing is certainly escalation and not the opposite. Consequences could be dramatic as I have no doubt that the Iranian regime has realized for a while that the end game for U.S., Saudi and Israel is regime change. They won't go down without fighting.
3- Oil supply: Inventories can be lowered to meet demand and it is possible that OPEC+ will agree to convene for an emergency meeting to reduce cuts temporarily.
The only thing that Saudi Arabia will care about is to meet demand with no regard to the eventual price following these attacks: they won't flood the market to lower pricing.
So what we get are lower global inventories and a price higher than now to account for geopolitical risk. Maybe $5. I think that for us Canadians, it is the best we can ask for or a higher price which will increase free cash flow for our companies while not endangering global demand and not encouraging U.S. shale.
Already, share prices have finally turned upward in Canada for all the factors that we have discussed for months and this will help further to highlight how profitable they are.
Of course, if we have a conflict, then all bets are off. The world would then realize how little true spare capacity was left and it would take months, if ever, for U.S. shale to replace missing barrels and it would not alleviate shortages in some heavier grades.
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