Great commentary by Eric Nutall at NinePoint Partners:
So what did they say? It turns out the press conference was more of a promotional event for the upcoming (?) IPO’ing of Saudi Aramco than being effective at clearing up the confusion in the market (which still remains). Officials downplayed the extent of the damage, thumped their chests about how quickly they were able to put out the (many) fires, and said that full “production” would be up by the end of the month. An important caveat to this is inventory drawdowns are part of their definition of “production” and credible estimates is that their working inventories stand at only 60MM Bbls. Production of 2.5MM Bbl/d was restored with 3.2MM Bbl/d remaining offline. Full “output” (is that well head production or production + inventory drawdowns?) is expected to be back to 100% by the end of September but the possibility of major inventory depletion remains (not that the oil price would tell you this at the moment).
While the oil market is fully believing 100% of this update consultants/experts that I have spoken with are highly skeptical of the above claims. Given that employees were just able to enter the facility yesterday it is estimated to take another 1-2 weeks to fully assess the extent of the damage (there were 19 “points of contact” with missiles/drones with 7 of their 11 spheroid oil and gas settlement vessels and 5 of their 18 oil and gas separation stacks getting hit) hence the Oil Minister’s confidence in his rather bold claims are being politely described as “optimistic.” Further, refineries in Asia have already been told that there will be delivery delays in October (China has chartered 4 VLCC’s to pick up US crude…will be bullish for WTI) and India is reportedly increasing shipments from Rosneft.
Now Mr. Nutall is a bull on Canadian mid-tier oil producers and runs a fund that is invested in them (which are very undervalued by the way) and so is inclined to have a bias towards a longer-term repair of these facilities.
Nevertheless, I am inclined to think this will take longer than the Saudi’s are saying. I have worked in industrial facilities that have exploded (BP Texas City refinery) and USN ships that incurred onboard fires in engine rooms.
It takes time to get in there and just do a proper assessment of the damage on these units. The explosions and subsequent fires would have burned up most of the instrumentation and communication wiring back to the control room. Piping and piping supports will have been destroyed in a worst case or at least incurred fatigue from the heat and will need to be cut out and replaced.
The columns and tanks that were hit are typically long lead time items and will take time to engineer, fabricate, ship, and reinstall. Also, someone will have to then come in and re-commission the facility after the repairs are made. Now I have no doubt the Saudi’s will throw money at their contractors to expedite this work, but it still takes time.
I am going to go ahead and say what most will not. The Saudi’s lie all the time (they have lied about their reserves for years), so I believe nothing they say. The Aramco IPO is their main priority currently and they do not want that upset. This attack is raising all kinds of questions about security of supply along with the fact that it shows how vulnerable Saudi oil facilities and the kingdom itself really are.
If the Saudi’s do not hit back at Iran does this then embolden Iran to carry out further attacks? We know from history unchecked aggression usually results in further aggression. Can the Saudis even hit back effectively if they wanted to? They need a coalition (which means the US) of the willing or they will get wiped out.
Their military is a joke and although I am sure they could attack Iran (Kharg Island oil loading facility for example) I do not think the Iranians would not hold back on escalation of the conflict.
Indeed, this may be Iran’s play. They may wait and see if there is any response from the US and Saudi. If there is a response, I am sure they will retaliate and also unleash their various proxy forces around the region. This thing could spiral very easily.
If there is a toothless response maybe they escalate some more and put more pressure on the US-Saudi coalition and oil prices in an election year.
As for the US I see Trump doing nothing except talking (he did direct an escalation of sanctions which never work). The last thing Trump needs during an election year is a full-blown shooting war in the Persian Gulf as oil would certainly head above $100/barrel in a full on war which could cause the US and even Israel to get involved.
I do not think this is over and eventually I believe we will have a full-blown shooting war in the Gulf. It could be prudent to own some oil related investments as a hedge.
I would suggest following Eric’s work. He is one of the last oil focused funds in Canada and does excellent work identifying extremely undervalued oil names some of which are selling with cashflow yields of 15 to 30%. You should also follow him on Twitter.