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Oil Extends Drop as Saudi Output Restoration Calms Market Fears

By Bloomberg 18 September 2019
Caption
The oil drilling rig stands at the oil and gas field processing and drilling site operated by Ukrnafta PJSC in Boryslav, Lviv region, Ukraine, on Thursday, July 4, 2019. Ukrnafta co-owner, Naftogaz JSC, the largest gas supplier in the country of 42 million people, is seeking funds to accelerate gas purchases ahead of the heating season and a potential disruption of gas transit by Russia’s Gazprom PJSC from the start of 2020. Photographer: Vincent Mundy/Bloomberg

Oil extended its pullback, after a dizzying start to the week, on signs Saudi Arabia is restoring production following a debilitating weekend attack on key installations.

Brent futures edged lower in early Asia trade on Wednesday after tumbling 5.7% as Saudi Aramco said it had revived 41% of capacity at a key crude-processing complex days after a devastating aerial attack that wrecked vital equipment and rocked global energy markets. The global oil benchmark, which jumped to just shy of $72 a barrel in reaction to the disruptions, was back to about $64.

The announcement followed conflicting media reports about the pace and probable duration of Saudi Aramco’s efforts to repair the damaged Abqaiq facility. Despite the kingdom’s reassurances at a media briefing in Jeddah, crude remained almost 7% higher than the pre-attack price.
WTI intra-day price moves are near eight-year high

The question of how the U.S. and Saudi Arabia will respond to the attacks on Abqaiq and an important oil field, which Secretary of State Mike Pompeo has blamed on Iran, still hangs over the market. The Pentagon is preparing an assessment on who was responsible for the strike and hopes to make it public, a U.S. defense official said.

“The market is certainly setting itself up for a surprise, considering they aren’t really pricing in that geopolitical risk premium at the moment,” said Daniel Hynes, a senior commodity strategist at Australia & New Zealand Banking Group Ltd. in Sydney.

Abqaiq is now processing about 2 million barrels a day and should return to pre-attack levels of about 4.9 million barrels by the end of September, Aramco Chief Executive Officer Amin Nasser said. The state-owned company will be able to meet all its commitments to customers this month by drawing on its crude reserves, Energy Minister Prince Abdulaziz bin Salman said.

Adding to the bearish sentiment, the American Petroleum Institute reported a 592,000-barrel increase in stockpiles for the week ended Sept. 13, according to people familiar with the data. That compares with analyst expectations for a 2.25 million-barrel drop. If confirmed by government data due Wednesday, it would break a four-week streak of declines.

Brent for November delivery fell 18 cents, or 0.3%, to $64.37 a barrel on the ICE Futures Europe exchange at 10:16 a.m. in Singapore. It tumbled by 6.5% Tuesday after surging 14.6% on Monday.

West Texas Intermediate for October delivery was down 38 cents, or 0.6%, at $58.96 a barrel on the New York Mercantile Exchange. The U.S. benchmark’s discount to Brent for the same month was $5.58 a barrel.

Meanwhile, U.S. President Donald Trump said he saw no reason to allow refiners to dip into the nation’s emergency reserves. “I don’t think we need to. Oil has not gone up very much,” Trump told reporters Tuesday aboard Air Force One. “There’s a lot of oil in the world.“

For more on the Saudi attacks and oil market

Saudi Aramco is firing up idle offshore oil fields — part of its cushion of spare capacity — to replace some lost production, a person familiar with the matter said. Some customers are being asked to accept different grades of crude. The kingdom’s domestic inventories are sufficient to cover about 26 days of exports, according to consultant Rystad Energy A/S.

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