OPINION: The oil geo-political risk premium that should never have disappeared is suddenly back – by Eric Reguly (Globe and Mail – September 17, 2019)


The weekend attack on an enormous Saudi crude oil-processing plant reintroduces a key factor – a geopolitical risk premium – that had largely disappeared from the price. The premium could remain permanent if any next attack were to take out a giant oil field. This one did not.

The skillful attack on the Abqaiq plant, which prepares crude for delivery in pipelines by removing its sulphur and other guck, and the nearby Khurais oil field put the vulnerability of Saudi oil infrastructure on full and instant display.

Drones, or possibly cruise missiles, hit several big tanks at Abqaiq and other equipment, sending clouds of black smoke billowing upward. The Iran-backed Houthi rebels in Yemen took credit for the damage, though U.S. Secretary of State Mike Pompeo, without supporting his claim with evidence, placed the blame squarely on Iran even though some reports said the attacks may have come from Iraq or from within Saudi Arabia.

On Monday morning, when the markets reopened, oil surged, climbing as much as 19 per cent. After reassuring words about ample supplies in storage around the world, the price for Brent crude, the international benchmark, retreated from its highs. By the afternoon, they were up about 14 per cent, taking the price per barrel to US$68 and change.

There was no panic – Brent is still down 12 per cent over the past year. The attack did not even make page-one news in most of the British papers, which were dominated by politicians trashing away on the Brexit file.

For the rest of this column: https://www.theglobeandmail.com/business/commentary/article-the-oil-geo-political-risk-premium-that-should-never-have-disappeared/

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