Saudi Oil Fields Attacked by Drones, Shutting Down Over Half of Saudi Oil Production

Posted on 09/15/2019 12:17 PM

Possible Trump/Xi meeting in November | Why Trump, Xi both need economies to grow

In today's updates:

* Oil prices surged following drone attacks on major oil field (see markets)
Trump and Xi could meet in mid-November around APEC summit
* China wants to make sure Hong Kong protests to not flare up Oct. 1
* White House proposes plan to reallocate RFS waivers over three years
* WHIP+ update
* Brazil wants trade agreement with the U.S. soon: Foreign minister
* Is the Trump administration mulling a currency intervention?
* WTO ruled in favor of U.S. in dispute over prohibited European aid for Airbus SE
* Brexit: PM Boris Johnson to meet EC President Jean-Claude Juncker on Monday

Markets: A major Saudi Arabian oil field was attacked on Saturday, with a big jump in prices. Brent crude on Sunday traded at $70.98 per barrel on oil futures markets, an 18% surge from Friday’s close of $60.15, before falling back to about a 12% increase. U.S. benchmark West Texas intermediate crude opened at $61.27 per barrel, a 12% rise, before easing to a 10% gain.
     Houthi rebels in Yemen, who are supported by Iran, claimed responsibility. Secretary of State Mike Pompeo blamed Iran for strikes, calling them “an unprecedented attack on the world’s energy supply.” Iran’s Foreign Ministry on Sunday rebuffed any suggestion that it was involved.
     The coordinated drone strike hit at the heart of Saudi oil production, forcing the kingdom to shut down about half of its crude output. The coordinated strikes forced Saudi Arabia to suspend production of 5.7 million barrels of oil a day, more than half of its output and over 5% of the global supply. Saudi Arabia’s Abqaiq facility and the Khurais oil field were attacked. The oil field produces about 1.5 million barrels of crude a day, while the facility processes more than 7 million barrels. The kingdom produces 9.8 million barrels a day.
     The Saudi interior ministry said the fires were under control, but while most of the oil output could be restored within days, it will take weeks to return to full capacity. Saudi Arabia’s national oil company expects to restore roughly a third of crude output disrupted in a weekend attack by day’s end Monday, Saudi officials said, but the strikes will likely leave the country short of full production capacity for weeks. Saudi Aramco, the national oil company, held an emergency board meeting on Saturday to manage the unfolding crisis. The WSJ reported Saudi officials are discussing drawing down their oil stocks to sell to foreign customers to ensure that world oil supplies aren’t disrupted. Link for details. Link for potential impacts.
     President Trump tweeted that he has authorized release of oil from the Strategic Petroleum Reserve "if needed" following the attack on major oil processing and production sites in Saudi Arabia.


U.S./China trade policy update:

  • Next Xi and Trump face-to-face meeting may take place in November (14-16) when both are expected to attend the Asia-Pacific Economic Cooperation summit in Santiago, Chile, sources signal.
  • Why tempering Hong Kong protests is important. On Oct. 1, China celebrates the 70th anniversary of the founding of the People’s Republic. Chinese authorities would not want to be embarrassed by any external protest.
  • Why China wants to have a healthy economy into 2021. In 2021, President Xi Jinping and China celebrate the centenary of the founding of the Chinese Communist Party. While President Donald Trump wants to make sure the U.S. economy is growing at a good clip in 2020, Xi Jinping has to have the same occur with China’s economy in 2021.

Trump administration reportedly plans to reallocate waived blending quotas over three years. The Trump administration reportedly agreed to boost the biofuels sector by reallocating three years of waived biofuel blending quotas beginning in 2020. EPA would begin calculating waivers into future quotas starting with the 2020 targets. The determinations would come via a three-year rolling average of exemptions, so the 2020 targets would reflect waivers issued in 2016, 2017 and 2018. The apparent new plan comes on top of other concessions that administration officials had already developed with the aim of encouraging greater U.S. demand for ethanol made from corn. The EPA is legally required to finalize 2020 biofuel-blending targets by Nov. 30, and any new, supplementary proposal must first be submitted for public comment. Link for details.

Key features of WHIP+ program (Link for more details):

  • Payments: Farm Service Agency Administrator Fordyce said it will take around a week to begin processing payments for the $3.005 billion program once applications are made.
  • Individual payment limit stands at $125,000, but if more than 75% of a producer’s income is from farming, limit is increased to $250,000 per crop year with a combined total for the 2018, 2019, and 2020 crop years of $500,000. Specified 2017 disaster payments fall under old WHIP-I rules.
  • WHIP+ payment factor will be based on the producer’s level of crop insurance coverage. WHIP+ will apply the complete payment factor for disasters in 2018, but only 50% for 2019 until USDA is able to fully assess what resources remain to pay the balance.
  • On-Farm Storage Loss Program payments will be calculated by multiplying the loss quantity times a price determined by the Ag Secretary then multiplied by a 75% factor. Payments will be issued after sign-up until February 2020 for losses incurred during calendar years 2018 and 2019.
  • Regarding prevented-planting supplemental disaster payments, for insured crops with a plan of insurance that provides revenue protection, the qualifying prevented planting payments will be multiplied by a factor measuring yield and price loss (15%), except for those who select the harvest price exclusion option. For all other crops, the qualifying prevented planting payments will be multiplied by a factor based on yield only (10%). Prevent-plant payments will not be subject to the 50% payment rule otherwise applicable for 2019 payments.
  • Delivery system for this program is still being worked out.

Brazil wants trade agreement with the U.S. soon: Foreign minister. There is no specific timeline for a trade agreement with the U.S., but Brazil wants it pronto, said Brazil Foreign Minister Enersto Araujo at an event in Washington, DC, according to Bloomberg. The two countries have trade agreements in certain sectors and, “in a way, we’re already negotiating,” Araujo said. Brazil and the U.S. are establishing a permanent security forum In March, when Brazil President Jair Bolsonaro was in the U.S, a “very ambitious new agenda” with the U.S. was launched, and that is taking shape.

Secretary of State Mike Pompeo says both countries will seek to increase $100 billion in bilateral trade and that the U.S. and Brazil are deepening a new era of closer cooperation.

Other items of note:

  • Is the Trump administration mulling a currency intervention? Link to WSJ article.
  • WTO ruled in favor of the U.S. in a dispute over prohibited European aid for aerospace giant Airbus SE, but its unclear how large the retaliatory tariffs will be, Politico reported, citing four European Union officials. Sent to Brussels and Washington on Friday, the still confidential decision by a WTO dispute settlement panel paves the way for the U.S. to impose billions of euros in punitive tariffs on EU products in retaliation for illegal subsidies granted to Airbus. One official told Politico that the U.S. had won the right to collect a total of between 5 billion and 8 billion euros. Another said the maximum sum was close to $10 billion. Both sides have a few weeks to add comments and delete any confidential business information before the ruling is officially adopted and made public. The U.S. has already proposed tariffs of up to 100% on $25 billion worth of European goods stemming from the nearly 15-year trade dispute. In turn, the EU has pledged to target $12 billion in retaliatory tariffs of U.S. goods.
  • United Auto Workers union to strike GM. A nationwide walkout at General Motors’ U.S. factories will begin at midnight tonight, after negotiations for a new four-year labor contract hit an impasse.
  • Conflict of interest? Rep. Ron Kind (D-Wis.) wrote to USDA Sec. Sonny Perdue questioning why 15 members of an agriculture advisory group to then-candidate Donald Trump reportedly received $2.2 million in trade aid payments. The situation "raises serious questions about conflicts of interests," Kind wrote.
  • Brexit update. Prime Minister Boris Johnson will meet European Commission President Jean-Claude Juncker on Monday to discuss potential changes to a divorce deal aimed at smoothing Britain’s planned October exit from the European Union. Meanwhile, on Tuesday, the U.K. Supreme Court will consider complaints that Mr. Johnson unlawfully advised Queen Elizabeth II to suspend Parliament for five weeks in order to reduce scrutiny of his Brexit policies.

Markets. The Dow on Friday rose 37.07 points, 0.1%, to 27,219.52. The S&P 500 slipped 2.18 points, 0.1%, to 3,007.39, while the Nasdaq edged down 17.75 points, 0.2%, to 8,176.71. All three indexes climbed for the third consecutive week.

For the week, the Dow industrials rose 1.6%, the S&P 500 was up 1%, and the Nasdaq edged up 0.9%.

Think China's currency can't compete with the U.S. dollar as a world currency? Sean Darby, the Hong Kong–based chief global equity strategist for Jefferies, told Barron's: “A few weeks ago, I looked up, and the PBOC (China's central bank) had just announced it was shortly going to publish its work on developing a digital currency, the e-yuan. What amazed me is that China’s financial system, in many ways, is still behind that of the West — but its big leap in developing a digital currency puts it far ahead of the Fed and other countries. For the past 50 years, the U.S.’ big advantages included the dollar and its economic scale. Well, China can scale four times more than the U.S. and is only just now trying to bring its currency into the mainstream. A new economic bloc is being created, scaling things to unimaginable levels.”


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