“Oil attacks shake market complacency, but we still expect USD50 Brent in 2020.”

After this weekend’s drone attack on the world’s most important crude oil facility, the Saudi Arabian authorities have announced that 5.7 million barrels per day (mbd), half of its daily oil production and 5% of the world total, will be taken off-line. Iran-aligned Houthi rebels in Yemen have claimed responsibility. Brent futures jumped by 20% to USD72 at the opening today in response to this news, the biggest intraday advance on record! (As we write, prices looked like settling around USD66.)

Saudi Arabia has announced that it can restart a significant volume of oil production within days but will need weeks to restore full output capacity. Knowing that OECD countries have stocks of more than 2.9 million barrels could also help calm some short-term fears. President Trump has already authorised the release of oil from the US’s emergency reserves, for example.

The market has long shown complacency regarding the existing tight balance between oil supply and demand. Geopolitical tensions and the difficulties of many oil producers have heightened the risks from sudden disruption of the sort we saw this weekend— even if, at time of writing, we were still far from the USD80-USD90 envisaged in our worst-case scenarios.

The events this weekend do not fundamentally change our medium-term scenario. We continue to consider that the oil market is structurally tilted towards oversupply in 2020 due to increased US export capacity and weaker global demand. The effects of this weekend’s events are likely to be temporary, with supply shortages compensated by stocks and alternative production. Based on the information available, we are not changing our USD50 per barrel forecast for Brent in 2020. But in the short term, the Brent price is likely to navigate in the USD65-USD70 range as the market realises it has been too complacent regarding the fragility of oil supply.

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