Following drone attacks at Saudi Arabia’s production facilities on Saturday, Brent crude surged the most on record with benchmark oil futures rising as much as $11.73 /barrel to $71.95 as the market opened today in Asia. As at time of writing, Brent has eased to $68.30, representing a 13.4% rise.

Saudi’s Energy Minister Prince Abdulaziz bin Salman said the strikes had reduced crude oil production by 5.7m bbl/day, which is about half the kingdom’s output.

Part of the decline will be compensated through stocks, though the level remains uncertain, with JODI reporting global stocks owned by Saudi Arabia at an 11-year low of 188 mb and Kayrros showing Saudi and Egypt combined crude inventories at 101 mb.

It is also unclear how long the outage will last – initially the “majority” of production was expected to be back online by Mon, then Tue; latest is that it will take “weeks” to get back to full.

With the latest development, oil-related stocks are expected to see a positive knee jerk reaction, and we will unwind the earlier 9 Sep recommendation to take partial profits on CNOOC and PetroChina – the former is down 1.2% while the latter is up 2.4% since.

Higher beta and previously high short-interest stocks should lead the way higher on a trading basis – e.g. US midcap E&P and services, seismics/E&Ps in Europe, and SMM in Singapore. Fundamentally, we would stick to our preference for the oil majors after the move fades.

For oil, with 1) less risk from Iran production returning, 2) higher geopolitical risk premium and 3) Iraq taking steps to reduce exports, downside risks to prices have materially lessened.

Source: OCBC Research - 16 Sept 2019