10 drones with explosives attacked Abqaiq and Khurais, 2 oil processing facilities in Saudi Arabia on Saturday, September 14. Abqaiq is operated by Aramco and is the largest oil processing facility in the world. The state of the damage is not yet clear but the attack has wiped out 5% of the world’s oil supply, which is about 6 million barrels or half of Saudi’s oil production.
The attack took place before Saudi Aramco’s preparations for what may become the largest initial public offering ever. The giant company is looking to list as much as 5% of its shares between 2020-2021.
Huge banks such as Citigroup, JPMorgan and Morgan Stanley met last week to work on the deal. The architect of the IPO Prince Mohammed said he expected the company to be valued at over $2 trillion. By listing 5% of the company’s shares at $2 trillion valuation, Aramco could raise near $100 billion through the offering.
How will this attack affect the IPO? That will depend on how long it will take the plants to restore its production, whether it will be 48 hours or 4 weeks would make a big difference. We also need to know the reaction of Saudi Arabia and the United States and see if there are any future attacks.
The higher risk factor may have an effect on the value of the company. On the other hand, some investors believe the attack won’t have much impact on the value, since the company is considering a multi-stage IPO, selling a 1% stake through the local Tadawul Stock Exchange before releasing it internationally, which is likely to be more sensitive to geopolitical risks.
The oil market hasn’t seen such a confrontation since the Gulf War in the 1990s. WTI gapped up by 13% and Brent Crude by over 14%. The price stabilized after president Donald Trump announced that he had authorized the release of oil from the Strategic Petroleum Reserve to make sure that there was sufficient supply. WTI is trading slightly below $60, at $59.34 per barrel and Brent Crude is trading around $65.38.
The demand assessment and time is critical. The grades that were affected by the attack are Arab Light and Arab Extra Light. The thing is that some refineries are only able to handle light crudes and aside from Aramco, there is no quick way or source to replace this supply. Saudi Arabia has enough reserves for 7 days. Asia is the top market for Saudi oil. Arab Light and Arab Extra Light crude oil grades account for approximately one third of China’s total Saudi oil imports.
Globally, the oil supply can easily bridge the gap, but we are going to have some price pains in the process.
It is unclear yet who is behind the attack. US Secretary of State pointed a finger at Iran, who denied having involvement, while a Yemen's Iran-backed Houthi rebels claimed responsibility. President D. Trump twitted that the US was ‘locked and loaded’ awaiting confirmation form the Kingdom, warning that he was prepared to take military action. This comes as an additional wedge between the US and Iran who have been at an impasse regarding nuclear program activities that has resulted in aggressive sanctions and increasing tensions in the Gulf.
On a 4HTF for WTI Crude, the price is not far from its 2-month’s high at 60.63, currently at 60.17.
Our targets to close the gap will be around 58.77, which is a strong area of support. Then, there will be 23.6% Fibo at 58.25. There is another strong support zone at 57.68. Then, there is 38.2% Fibo at 56.77. The price needs to drop between the 50% and 61.8% Fibo levels to 55.03 to completely close the gap.
If we are to see an escalation in oil market tensions, like more attacks, the price will rise with resistance target areas at 60.94, 62.54, 63.76, 64.71 and then the high of 2019 at 66.58.