Asia sets up oil emergency plans as Saudi strike upsets prospects

TOKYO – The drone strike on Saudi oil facilities on Saturday has highlighted new vulnerabilities in the global crude oil market, disrupting expectations of lower oil prices and pushing distributors to consider a potential shortage.

Most market participants felt that supply would not decline drastically, regardless of the tensions in the Middle East. This helped prevent prices from surpassing the recent peak reached in October 2018, even after the tanker attack in the Strait of Ormuz last June.

But Saturday's attack prompted Asian distributors to seek information, especially because of their growing dependence on Saudi oil and US sanctions against Iran.

"We do not know the extent of the damage," said Japan's Cosmo Energy Holdings. Others have also struggled to paint a clear picture as early as Monday.

Stopping shipments from Saudi Arabia, which accounts for nearly 40% of Japan's gross imports, "will have far more serious consequences than the embargo on Iran," he said. said a source of JXTG Nippon Oil & Energy, a unit of JX Holdings.

In South Korea, the government said it was ready to release oil reserves if needed, according to local media reports.

US President Donald Trump told reporters on Monday that he thought Iran was to blame. Asked by a White House reporter that Iran was behind the attacks, Trump said, "This is certainly happening now and we will let you know. As soon as we know it, we'll let you know. look this way. "

On Sunday, Trump had tweeted that he "has reason to believe we know the culprit" and that the US was "locked and charged according to the audit", alluding to retaliation when he was proved that Iran was responsible.

Saudi Arabia, one of the world's largest oil producers with the United States and Russia, holds most of the world's production capacity. According to the International Energy Agency, the world's leading oil producers, with the exception of Iran, have a production capacity of about 3.2 million barrels a day. Saudi Arabia accounts for about 70%, or about 2.3 million.

The kingdom played a leading role in OPEC's coordinated production cuts. It is also the only country that can quickly increase production when needed. To reach a daily output of more than 5 million barrels, oil supply could be below demand even with all the world's excess capacity.

On Tuesday, the Tokyo Stock Exchange, crude oil futures opened the session after the holidays, up 12% from last week's close to a two-week high. But analysts have noted that the hike seems for the moment limited, following announcements from the United States and other governments that they planned to release oil from their reserves.

The South Korean government will consider releasing its strategic oil reserves in the event of a supply disruption, said a senior government official at the Yonhap News Agency. The official spoke after an emergency meeting Monday between the government and South Korean refiners.

Meanwhile, the China Daily, an official newspaper, reported Tuesday that China would be able to supply oil at home if imports from Saudi Arabia were affected. Saudi Arabia is China's leading oil supplier this year.

Japan has several options to fill any gaps.

The government has leased oil storage facilities in Okinawa to Saudi Aramco since 2011. Although the Saudi-owned titan usually sells this crude to countries in Southeast Asia, it will give the priority in Japan in case of emergency. Tokyo also has a similar arrangement with the United Arab Emirates. Together, they provide access to about 1.9 million kiloliters of oil, enough for five days of demand.

Japan can release oil from its own stocks if it proves to be insufficient. In total, the country could draw 81.65 million kiloliters of crude products and petroleum products at the end of June, or 231 days of consumption.

"Even if the offer is reduced, there will be no serious upheaval," said a senior official at the Ministry of Economy, Trade and Industry.

The question of whether national reserves would last long enough for Saudi production to return to normal, however, remains an open question.

Reserves provide a safety net to avoid short-term supply disruptions, but starting to reduce them would contribute to worsening market anxiety. And the drone attack has exposed the vulnerability of Saudi oil facilities. Crude market players will likely demand a higher risk premium, leading to higher prices.

"It's impossible to be optimistic now," said Naohiro Niimura of Market Risk Advisory in Tokyo, who estimates that Brent crude should be between $ 70 and $ 75 per barrel.

"If a total conflict broke out between Saudi Arabia and Iran, [Brent crude] would probably break $ 100, "said Niimura.

Japan is particularly attentive to the impact on liquefied natural gas, the price of which is often tied to crude prices in the purchase contracts.

The country has become increasingly dependent on LNG as a source of energy since the decommissioning of its nuclear power plants following the March 2011 earthquake and tsunami. An increase in the cost of fuel could translate into higher electricity rates.

"This would have an impact on the economy," said a source from JERA, Japan's leading supplier of fossil energy.

Soaring oil prices resulting from a supply shock would put an additional burden on a global economy already hit by trade tensions between the United States and China.

If this increase continues during the coldest months, it will "coincide with the growing demand for heat and the effect on prices and the economy will become impossible to ignore," said Takayuki Homma, chief economist at Sumitomo Corp. Global Research.

Travelers can also be affected. Japan Airlines reflects oil market fluctuations in its fuel surcharges, with a lag of about four months, and will likely charge more if crude prices remain high.