Brent rises 1% as Saudi supply risks come into focus

FILE PHOTO: Oil rigs are seen at Vaca Muerta shale oil and gas drilling, in the Patagonian province of Neuquen

By Collin Eaton

HOUSTON (Reuters) – Brent crude oil prices rose more than 1% on Thursday on fears of longer-than-expected supply shortfalls following Saturday’s attacks on a key Saudi Arabian oil processing facility and escalating tensions in the Middle East.

Global benchmark Brent settled 80 cents, or 1.3%, higher at $64.40 (51.36 pounds) a barrel, while US West Texas Intermediate (WTI) crude pared earlier gains and ended largely steady at $58.13 a barrel, just 2 firmer cents.

Saturday’s attacks knocked out around half of Saudi Arabia’s crude production and severely limited the country’s spare capacity, a cushion for oil markets in any unplanned outage. Tensions have escalated as the United States and Saudi Arabia blamed the attacks on Iran.

“The Saudi oil industry could be threatened again and we could see more supply disruption from the Persian Gulf,” said Gene McGillian, vice president of market research at Tradition Energy in Stamford, Connecticut.

“What’s hanging over the market’s head is the response that may be coming. How will the US and Saudi Arabia respond to this?” he said.

Saudi Arabia, the world’s leading crude exporter, has said the crippling attacks on its oil sites were “unquestionably sponsored” by regional rival Iran.

The United States said it was building a coalition to deter Iranian threats after the Sept. 14 attack, while the US military said it was consulting with Saudi Arabia on ways to mitigate threats from the north, which US officials also blamed on Iran.

Billions of dollars spent by Saudi Arabia on cutting edge Western military hardware mainly designed to deter high altitude attacks proved no match for low-cost drones and cruise missiles used in a strike that crippled its giant oil industry.

US President Donald Trump said there were many options short of war and added he had ordered the Treasury to “substantially increase sanctions” on Tehran. Iran has denied involvement in the strikes and warned Trump against being dragged into war.

US Secretary of State Mike Pompeo has described the weekend strike as an act of war. He said Washington has been discussing possible retaliation with Saudi Arabia and other Gulf allies but wanted a peaceful resolution.

“We are still striving to build out a coalition in an act of diplomacy while the foreign ministry of Iran is threatening all out war and to fight to the last American,” Pompeo said. “We’re here to build up a coalition aimed at achieving peace.”

Saudi Arabia has said it would restore lost production by the end of this month, and bring its capacity back to 12 million barrels per day by the end of November.

The Wall Street Journal reported Saudi Arabia had asked Iraq’s State Organization for the Marketing of Oil (SOMO) for as much as 20 million barrels of crude, but an Iraqi state news agency said SOMO denied Saudi Arabia had requested crude supplies for its refineries.

The oil market “is rapidly calling into question whether Saudi Arabia can come through this as cleanly as they claim,” said John Kilduff, a partner at Again Capital LLC in New York.

Also lifting prices, the US dollar <.DXY> weakened and traders were likely unwinding some short positions after this week’s turbulent trading, said Josh Graves, senior market strategist at RJO Futures. But geopolitical risks were the biggest factor in the price rise, he said.

“The fact that we haven’t traced back to the low-to-mid $50s means there’s an expectation Trump would intervene,” Graves said.

(Additional reporting by Ahmad Ghaddar in London, Florence Tan in Singapore; Editing by David Gregorio and Marguerita Choy)

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