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Oil Price Hits $71pb After Attacks On Saudi Facilities

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The price of Brent crude gained $12 in early trading to hit $71.95 per barrel yesterday.

Brent crude futures, the international benchmark of crude oil, recorded its biggest gain in seconds since it was launched, when trading opened.

The oil prices surged to six-month highs while Wall Street futures fell and safe-haven bets returned after weekend attacks on Saudi Arabia’s crude facilities knocked out more than 5 per cent of global oil supply.

The U.S. crude futures were last up 11 per cent at $61.10 a barrel, coming off highs on expectations that other global oil suppliers would step in to lift output, while Brent crude soared 13 per cent at $68.06 after earlier rising to $71.95.

Similarly, the price of West Texas Intermediate crude, which is traded by the U.S., was also higher by 9.5 per cent, hitting $60.06 per barrel. Latest reports say the attack cut five percent of global oil supply and it is estimated that Saudi lost 5.7 million barrels of its 9.8 million barrels daily production, according to the August data provided by the Organisation of Petroleum Exporting Countries (OPEC).

Yemen’s Iran-backed Houthi rebel group had claimed responsibility for the attack, which hit the world’s biggest oil-processing facility, but a senior U.S. official told reporters on Sunday that evidence indicated Tehran was behind it.

The attacks heightened investor worries about the geopolitical situation in the region and worsening relations between Iran and the United States.

Those fears powered safe-haven assets, with prices for gold climbing 1 per cent in early Asian trade to $1,503.09.

“If risk appetite collapses due to fears of worsening middle east tensions in the wake of any retaliation to the drone attacks, some emerging markets could face a double whammy of pressures,” said Mitul Kotecha, Singapore-based senior emerging markets strategist at TD Securities.

Experts in the oil industry have expressed concern over the prospect of Nigeria benefitting from the current hike in crude oil price in the international market due to the September 14 attack on oil facilities in Saudi Arabia.

Meanwhile, experts say given what has happened in Saudi Arabia, OPEC is unlikely to enforce the production cuts until the Saudis are back in the market. Hence the internal instability can translate to Nigeria taking advantage to increase her production output on the short run.

However, there are fears that similar instability and insecurity in the Niger Delta and the North East may deprive the country such opportunity.

The resilience of Boko Haram and assorted insurgents in the Niger Delta mean that Nigeria is not at all well placed to step into any supply gap created by a Middle East war as it was able to do during the Gulf War in 1991, experts say.

“Nigeria’s strategy of essentially accommodating theft of what amounts to almost 10 per cent of daily official production numbers by the actors in the Niger Delta has guaranteed the unbroken flow of supply from the Nigerian oil fields in the delta. So the country stands to gain a bit if this holds. However, given that the US has said it would release oil from its strategic reserves in order to balance supply, there will be no windfall for Nigeria,” an expert on the development told journalists.

There are a couple of scenarios:

If supply disruptions last a couple of weeks, a combination of a release of excess storage by the Saudis and the Americans might be able to stabilise crude oil prices, especially as Donald Trump is committed to low oil prices.

If supply disruptions and, hence, shortfalls last a lot longer (like a couple of months), there are likely to be significant gains in crude oil prices, which will be to Nigeria’s benefit, but it remains to be seen how long these shortfalls will last given that swing producers, such as America’s frackers, could rapidly ramp up supply to meet demand shortfalls.

An escalation due to retaliation by the Saudis backed by the US on Iran will mean that the disruptions will last significantly longer, much longer than the palliatives can moderate. On the Iranian side, the Chinese have a strategic interest in ensuring the continued supply of Iranian oil and hence may weigh in as well. This has the potential for drawing out the conflict or moderating influence on how the actors escalate issues. This unlikely scenario may provide a similar outcome to the Gulf War Windfall of the 1990s which Nigeria mismanaged.

In summary, the best-case scenario for Nigeria is a minor uptick in crude oil prices, but nothing of the scale of the “Gulf Oil Windfall” of 1990/1991. However, things could change if retaliation by US/Saudi Arabia on Iran sparks an all out war in the Gulf. This is likely as there is limited appetite for the kind of crisis that could not only lead to a prolonged period of high oil prices, but trigger global recession or even a depression.

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