European chemicals stocks fell on Monday in line with wider markets as fears of sharp oil supply drops weighed on economic sentiment, following the attacks on Saudi Arabia’s core oil production infrastructure and potential military intervention.
The country's energy major Saudi Aramco on Saturday confirmed drone attacks on its Abqaiq processing facility and at the Khurais oilfield, which halved the Kingdom’s oil production capacity and reduced global supply by 5%.
The most dramatic attack on the country since former Iraqi premier Saddam Hussein fired a missile into the Kingdom in 1991, the attacks cut Saudi oil production by 5.7m bbl/day.
The country is expected to claw back a third of that production capacity early this week, but a longer outage could send shock-waves through the global crude and petrochemicals markets.
Many key petrochemicals supplies in the country have confirmed feedstock curtailments of 16-50% as a result of the Aramco outages, meaning that trade flows in the region could be substantially disrupted.
Oil markets have remained in surplus through the first half of 2019, confounding analyst expectations of a deficit during the period due to the extent of the decline in global demand growth amid economic weakness and political uncertainty.
Demand growth in January-May slipped to the lowest levels for the period since 2008, in the run-up to the global financial crisis, according to OPEC earlier this month.
The extent and duration of oversupply has resulted in investors paying less attention to attacks and supply disruptions in the Middle East, centres around a series of attacks on tankers passing through the Strait of Hormuz.
The shock of this latest incident may change that, according to ING head of commodities risk strategy Warren Patterson.
“Market participants have failed to price in a risk premium around Middle East tensions, despite a number of incidents over the summer,” he said.
“There have been reports that production could return to normal in a matter of days, which if the case means the upside would reflect more of a risk premium, rather than a significant tightening in the market.
"However, we believe any indication or confirmation from the Saudis of a prolonged outage would see Brent trading back above $70/bbl in the near term,” he added.
The attacks have also raised fears of a military response from Saudi Arabia and the US.
The Houthi rebels in Yemen, an Iranian-backed group according to ING, has claimed responsibility for the attack, although US Secretary of State Mike Pompeo has reportedly blamed Iran directly.
US President Donald Trump said that the US is “locked and loaded” to respond, and was awaiting verification from the Kingdom on the identity of the attackers.
The US is prepared to draw on its Strategic Petroleum Reserve if necessary to help stabilise supply, according to Trump.
The country has grown dramatically in prominence as an oil producer in recent years, briefly overtaking Saudi Arabia as the world’s largest oil exporter in June this year, and the extent of the outage could test the nascent oil superpower’s ability to balance the market in the aftermath of a significant shock to the system.
The country’s unconventional oil sector is less dominated by large incumbents than more conventional crude markets, and a protracted large drop in global supplies could present a test to the scattered sector’s ability for a coordinated response.
In Europe, majors like AkzoNobel, OCI, Yara and Arkema were among the biggest losers within the chemicals stocks in morning trading on Monday, with their shares falling over 1.5% compared to Friday’s close as of 13:15 London time.
November Brent and October WTI crude futures spiked by $5/bbl and over $4/bbl respectively as investors reacted to the news on Monday.
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