Saudi Arabia's Oil Production Impacted For Weeks

Good morning to you, hope you are well. Tuesday the 17th of September, I'm going to talk about a couple of things, updates in regards to the situation yesterday. Obviously the big market mover since that episode at the weekend in Saudi Arabia, oil prices still at the forefront of investors' attention. So we're going to have a look at what's the latest to look out for on that regard from a news perspective for me and from a technical and setup perspective from Sam. They're going to have a look at what Trump has had to say and then move over to Brexit. You obviously, I'm sure, would have seen the news yesterday when the empty podium, when the Luxembourg PM came out and obviously was talking to no one because Boris Johnson got heckled that he just dodged the press conference. So we'll have a quick update on Brexit. Where are we at the moment with those negotiations and, and what are we looking out for next as Boris now goes to court? To defend his decision to suspend Parliament starting today. And then we're going to have a look at the trade deal which has been struck between the US and Japan, which is the latest in the global trade negotiations on that front. So just having a look at the charts at the moment this morning, the dollar index is basically flat, so not a great deal of movement in the major currency pairs. EUR/USD on the top left perhaps just finding a degree of support technically around the session low that we've seen late in the European afternoon. It's been the lower bound of price activity, um, what otherwise was pretty quiet overnight Asia-Pacific session. A little bit of a dip to retest those lows as Europe's come in this morning very early. In the equity space, not too much. A little touch of softness perhaps across the equity index futures. Again, the overall kind of broad interpretation for those other assets aside from the spike in oil is obviously the implications that has on underlying sectors. Like we saw a lot of the, um, the across-the-Atlantic airline stocks in the States getting, getting hit quite significantly yesterday. Jet fuel, one of obviously the biggest costs, or the biggest singular cost constraint for an airline firm. So there were, there were spots of weakness in relation to that move, but overall as well, from a macro top-level perspective, people's concern concerns about renewed geopolitical unrest. How exactly is this going to be dealt with? Will the US get involved? Will this now lead to a new, more military-based confrontation between Saudi and Iran? Or all this is quite destabilizing on that geopolitical front. So do you get that kind of traditional rotation in that respect coming out of equities? But all in all, the other assets are not really reflecting too much of that. Gold, if anything, Um, is down this morning but still holding that $1,500 level psychologically, which also lines up pretty well in the top right here to the, the S1 on the daily pivots. I still haven't fully closed the gap yet on the move, but we, when we jumped higher on Sunday night in the futures market, uh, in, in the way really is that psychological handle and that, and that pivot level and low tested this morning. T-notes flat. Um, support around pivot for the moment in the near-term price action, but largely unchanged and pretty similar to the Bund as well this morning. So let's get up to speed with what's going on. Let's have a quick chat about Saudi Aramco, um, to face weeks without majority of output at their major, um, basically facility which accounts for 50% of the entire supply coming out of the country. This is probably the latest development that's happened since the time we delivered the briefing from yesterday. Saudi Aramco becoming less optimistic that there'll be a rapid recovery in oil production from the weekend's attacks, and they've now moved the goalposts from a couple of days to now facing a couple of weeks or perhaps even months before majority of output is restored at that processing plant. So if you actually think about the price activity yesterday, We obviously exploded higher at the, the reopening of trade on Sunday night. However, we then came back down, natural kind of profit taking, and this is where the kind of technicals come into play. As I can see here, Sam had marked up yesterday the high that we had in the prior week acts then as that kind of area of key support. And then as the details started to come through that perhaps actually the initial interpretation that we were getting from the press was that this could be quite a quick solution to fix. Obviously, the US, as we were talking about yesterday, were intonating towards they could use things like the SPR, for example. Apparently Saudi Arabia have put the order out in order to put into work as quickly as possible idle facilities in order to get production back online to mitigate the fact that, you 5.7 million-odd has been taken away from that, that disruption. But the fact that it's going to take so long to get back online, as that started to come through, prices started to remain elevated again, technically just hitting pretty much to the same exact point where we did at the initial volatility at the open on Sunday night. So still elevated for the moment, and we still remain, I guess, mindful of, of listening out for a more concrete updates of the exact specifics, but I would imagine it's going to take some days before they really have a more accurate answer to that, um, to that question. Now, a few other things to be aware of then: how much does the kingdom have in terms of crude exports and storage? Because obviously they, they will run a degree of infantry in order to counteract these types of events so that there's no more severe immediate impact. And the stocks in days of exports is basically 26, and so for the time being that does buy them a degree of time. So if it is multiple weeks, although that I think will underpin the price of oil and help keep it elevated, they do have the ability to do that, and particularly depending on how quickly they can utilize the spare capacity they have with idle sites as well will be quite key to look out for. Um, this as well is obviously Saudi operates within, still for this time being, uh, within the framework of OPEC and OPEC Plus. Um, but as this graphic depicts, there's very little spare capacity that other members have. If you remember, Saudi Arabia being a country that was pumping just shy of 10 million, uh, is commonly believed that they do or have the potential to go up to 12 million. Other countries do not have anywhere near that kind of 2 million flexibility. Uh, the UAE is probably the largest, as followed by Kuwait, but their spare capacity resides at about 300,000. Um, spare capacity at the other, of course, biggest non-OPEC member, Russia, is only about 110,000, 120,000. So if you think about it, even if this OPEC current supply pact is to cut production by, say, 1.8 million, collectively, then even if they were to do the entire spare capacity that they have, let's say that's 3, 600, 7, 8, and then 7, 750, 800,000, that is nowhere near offsetting the 5.7 million shortfall that Saudi Arabia are doing. So there's not really a lot that the rest of the OPEC nations can do, and that's not even saying that there's probably gonna be a lack of appetite really to, to respond in such a way. This was an interesting, or perhaps useful, infographic that I saw last night. I did share this on my Twitter account. Obviously my handle for my Twitter account is below, but I think it's quite useful often when you have these types of events to really get under the bonnet of what is the actual infrastructure and what are the potential oil vulnerabilities of Saudi Arabia. It's good to know the kind of lay of the land— where are the, the major oil terminals, refineries, oil fields, gas fields, pipelines— because then when you do hear officials comment or you hear of a breaking news headline, you're just a little bit better equipped about how generally the facilities are laid out. And here you can see the two targeted attacks that happened at the weekend in those facilities, which basically is the zoomed-in area here. So basically, a lot of this coming from the Persian Gulf side, of course, of where it's situated with, you know, kind of Iran, Kuwait, Iraq, as well as Saudi, and then the Persian Gulf coming out through the Straits of Hormuz, which is obviously critical choke point. And then the pipeline gas oil pipelines and gas pipelines that go from east to west to then hit the Red Sea to go into the Suez and into the Mediterranean. So again, if you did need to have a look at that, it's quite good. It has some additional information down at the bottom looking at their current Saudi crude stocks, but also interesting to know Saudi Arabia's crude exports by destination. Of course, China number one, top of that, followed by Japan, India, and Egypt. Um, looking out for more details then from Saudi Arabia. From a news perspective, I'm definitely interested to see, um, what they have to say more officially, particularly around these detailing, which could be a market-moving event for sure for oil, about whether or not they say this is a 1-week fix and how much can they turn around in 1 week, or is it 3 weeks, is it 6 weeks. Obviously the longer that period, the more bullish for a price it becomes. So the Saudi energy minister is holding a press conference at 8 PM local time, so that's going to be 6 o'clock London where we're going to be looking out for that. So do stay tuned if you're sticking around as an energy trader. I'd say that's worth adding to your calendar, 6 PM this evening. The other thing, of course, on the geopolitical side is Donald Trump. How is he going to respond We saw yesterday the Secretary of State was very critical, pointing the finger at Iran. Trump, although saying "locked and loaded," perhaps a little bit more diplomatic, waiting to see what the Saudis say first. But importantly, Donald Trump has said on Monday it looked like Iran was behind the attacks on oil plants in Saudi Arabia. So he is saying it's now Iran, but he stressed he did not want to go to war. As the attacks sent oil prices obviously soaring and new fears of conflict in the Middle East. Now, importantly, obviously from a foreign policy point of view, Trump has been very vocal about the fact of withdrawing troops out of the likes of areas like Afghanistan, foreign wars that are ongoing, and that's been part of his mandate for a long period of time. And so getting committed now into military involvement in Iran would be pretty much going against what he's been saying for the last 3 years. And it's very difficult then politically to flip that so near term towards when we're going into this political campaigning period now for 2020. So hence the reason why you are seeing a slightly more measured Trump, but also that could then be factored into price in a sense that if he is going to respond in a more tame fashion, then that does take away the immediate geopolitical kind of fear to some level. I guess then one thing I'd be mindful going forward in the coming days, weeks, and months is, does Iran feel now really that without any repercussion from the US that it can really start doing multiple events like this if it comes down to Saudi having to protect themselves. And if that does happen, obviously we could be in for more quite severe supply shocks like we've just seen over the weekend. So that's, that's your kind of wrap, if you like, of, of what's going on on the Saudi side. Moving over to Brexit, a couple of different things. Yesterday he was meeting with a couple of European officials. The atmosphere around the table was reportedly said friendly, although a breakthrough was no closer. No real further detail upon any type of solution around the issue of the Northern Irish border coming forward as yet. The Prime Minister's officials have indicated as well that Boris Johnson will defy the new law designed to force him to seek a delay to Brexit rather than allow a no-deal split next month. So this has been one of the things that come out the press, of course, at the weekend. Boris Johnson did say he would not breach the law, but didn't go into detail then of how he would get around the vote in Parliament that obviously requires that if he can't get a deal, basically in principle, agreed by the EU summit on the 17th and 18th of October, then by the 19th he needs to go back to Europe and request an extension. Beyond then the deadline of October 31st. So again, he's saying that he's going to defy the law, but he's then saying he's not going to breach the law without saying how he's going to bypass it. So again, it's all this kind of political posturing. Um, the things that are happening right now are the Constitution in itself is going to be heard in Supreme Court proceedings this week after Scottish judges ruled against Johnson's suspension of Parliament. The hearings are scheduled to run from today until Thursday, but the actual outcome of those hearings might not be known till next week. Obviously, the, the kind of far-reaching scenarios here, if it's found, the Supreme Court, that Johnson's suspension of Parliament was, let's say, not justified in a sense, and therefore it was a misuse of his power, then obviously that would be the most surprising outcome, uh, and I'd say probably the most then, uh, bullish in the sense of the pound in its initial reaction. But I don't think that's going to happen. I think these court hearings, quite frankly, are a bit of a sideshow rather than a main catalyst to change the direction of where we are heading at the moment. Moving on, finally, this is probably much lower. It's not really something I'd consider from a trading strategy for today, but something to be aware of given the fact that on beyond the, the remit of the China-US talks, there's obviously Japan as well. And Trump has said the US and Japan have reached an initial agreement on tariffs. However, the one sticking point still is whether or not Trump is going to reverse his threats to impose tariffs on Chinese or Japanese auto imports, which of course are particularly important for an export-led nation like Japan in the automotive sector. So yeah, quite interesting, but I don't think that this was the one that's ever been too much in question. I think the one that's very much more so outside of China, it will be interesting in time, will be of course the one when he starts targeting Europe and as he has done with Germany, uh, that being the president more recently. Okay, quick look at the calendar. What have we got on the agenda for today? So just having a look, uh, for the session, you've got German ZEW coming out at 10 o'clock. That, just as a reminder for anyone new to the economic data kind of series, ZEW is the Economist's and analysts' 6-month— generally current conditions and 6-month outlook about what they think of the German economy going forward. So as you can see, these are deeply negative at the moment in terms of the actual index reading of economic sentiment, looking for slight improvement off basically the worst bottoming out kind of process going on at the moment. So not exactly increasing optimism, but slightly less pessimistic, I'd say, is probably the best description of that. Is that going to move the euro, anything like that? I'd say probably not. Not having heard so recently from the ECB, I don't think the German data being weak is particularly shocking at the moment. Going into the US session, um, it starts to get more interesting from the activity side of the datasets. Industrial production, cap utilization, manufacturing output will all be watched quite closely. And then you've got the API inventories coming out later on tonight. Speaker-wise, a couple of ECB members, ECB's Lane and Coeur, speaking later, 5:35, 6:10 London time, later on early evening. All right, that is it from me. Going to hand you over to Sam and wish you a good day ahead. Thanks very much, guys.

Hi guys, good morning. Um, starts with, with oil to, to begin with. And pretty much on, on the briefing when we were talking, uh, literally this time yesterday, oil was on its low of the day and we were saying how important that, that level was as a line in the sand for the day and week ahead. And you can see just the importance here still marked up in the, uh, the rectangles from yesterday. Around $59, uh, the highest that we had back on the 31st of July, and also just the 10th of September, 7 days ago. We came back down, found great support there before pushing higher, and, uh, double test of yesterday's high. So we're keeping an eye on that, and you could argue then we're looking for a neckline for that double top. This makes this level even more important here on the futures is coming around 61.50. Yes, you've got the pivot there as well. So your new line in the sand to the downside, I would have marked up around there, 61.50 or, or thereabouts. And, you know, another test of the, the high around 63.35. Uh, be keeping a close watch on that, uh, as well. So oil found great support before pushing higher. Uh, if we have a look over at another market which was at an interesting level at the time as well. You had the, the equities in, in the US which just couldn't really break their, their trends to the downside. We then did get that gap fill as well and found really good resistance there. So not in the way of too much movement really yesterday for stocks. Now we've had that gap fill, uh, 3,005. Obviously keeping a watch on that again today, uh, for potentially can we get another test of those, that triple top area from, from last week. Um, keeping an eye this morning on what the DAX does, of course, as we have pushed higher from its low and a strong push there on the, on the open, really the last 15 minutes, uh, seeing a decent move, uh, to, to the upside. So be keeping, uh, you know, watch what happens around there. Just having a look really now at the, the trend from yesterday's high. You can see that just marking up here now with the high that we just had post-open. So obviously the high of the day yesterday afternoon's high, and now as well just containing price action there. So a break of that, uh, we can look into yesterday's high and then actually the, uh, DAX to follow US equities from yesterday and fill the gap as well. But for now holding firm on, on that level. As well. Another market which we were saying yesterday, uh, was at an interesting point, of course, was, uh, T-notes. And that— let me just put this on a daily chart. We're just saying the importance of this, this whole area where we found the low on Friday, and since then we've had a big bounce to, uh, the upside. However, we are just starting to perhaps again, you know, look like we're just finding a bit of a trend. So worth keeping a watch on that. We've already hit, uh, the previous low before that final push down on Friday. First test of that early this morning. So price just getting squeezed perhaps there for, for T-notes. Uh, maybe volume in the afternoon increase, we can see a push higher. But of course with the Fed, uh, that's gonna be the real dictator, as we were saying with gold yesterday, uh, which did drift lower, uh, and follow Following the gap higher on the weekend, we've now reversed a fair bit of that. 1,500 key, just above the S1, and then of course where we found quite a lot of support around 93 last week on the 10th overnight, the 11th, you could argue the 12th, and also the 13th. So quite an important point coming up for gold there. Silver, which broke, uh, gapped higher as well, is doing the same thing and just drifting down after failing to make a new high, uh, yesterday evening. You can see the importance of that level from, uh, the lows that we had really for a fair bit of last week. Just a really key point, $18.063 there for, uh, for silver, just as your line in the sand to the upside. A break above that, and sure, we could look for a continued push. Uh, it's actually relatively technical both to the upside and the downside in this new range as well. Quick look over currencies just to, uh, to wrap things up. Just gonna have a quick look at the, the euro to begin with, which has just had a nice bounce from that low. And again, this is a quite a key level as well, just from a price action point. There's the obviously the ECB spike higher and lower, but just around here has been decent price action over the last week. So First real test of that again this morning, decent bounce. We're now back up to the higher day, although be it a very small range of just, you know, 21 ticks there for, for the euro. We broke lower yesterday after breaking what was good support, and now, you know, we're not too far away. Uh, well, I guess we're pretty much bang in the middle of the ECB spike, but a break of these lows here, I wouldn't say much is going to stop it. Before us drifting down towards the S1 and, you know, potentially even that low of the year, or multi-year should we say, that we got on the, uh, just before the press conference of the ECB. So a couple important points there for the euro. Pivot looks also quite key as well as a decent breakdown area that we had from yesterday around 111 handle as well. Pound, just to finish things up, relatively quiet this morning just like euro. So not too much going on. Of course, with the Fed and Bank of England, that's, uh, to be expected. Small range containing things at the moment. Just be keeping an eye on the pound if we were to drift, uh, you know, lower down. You've got around the S1, 124.34, the higher the 9th, which also broke through. And, uh, if we— that wasn't to hold, you've got a nice trend that of course broke, uh, last Friday. So we had to have a look to see to see at any point, do we get a retest of that? If that was to happen today, it'd obviously be more than likely a fundamental reason to get down that low. But certainly that's an area that I would have marked up as well. Any questions, as usual, uh, please, uh, do, uh, let us know. But if not, I hope you'll have a good trading day.