U.S. Insulated From Possible Supply Shock After Saudi Attack – The Wall Street Journal

While the attack may not lead to immediate price increases or long-term outages, it could rekindle market angst about the power of geopolitical risks and the potential fallout of future attacks if tensions between Saudi Arabia and its regional rivals continue to escalate.

It also underscores the dramatic change that has occurred in the U.S., which is now the world’s largest crude producer and among the top exporters of oil and gas. For the first time in decades, President Trump would be in the rare position of having the ability to help stabilize the oil market in the event of a prolonged outage. That’s a remarkable turnaround from the 1990s and 2000s when the country had far greater dependency on foreign crude.

While the U.S. still imports significant volumes, including from Saudi Arabia, Mr. Trump could authorize an emergency release of stockpiled crude that could help mitigate price increases, analysts said. The U.S. Strategic Petroleum Reserve holds more than 600 million barrels of oil. He could also temporarily ease sanctions on Venezuela or Iran or alter trade restrictions that have affected U.S. crude exports.

The U.S. also has the capability to lift output at home. A significant boost in prices would be a shot in the arm for shale producers, who have been under tremendous pressure from investors to restrain spending and focus on profits.

A loss of 5% of global capacity for several months could cause crude prices to double without such emergency steps, said

Ed Hirs,

a natural-resources fellow for accounting and advisory firm BDO USA LLP.

“U.S. industry would make a mad dash, and there would be a big boost in demand for fracking and completion activity,” Mr. Hirs said. “Companies could increase production in three to four months, and there would be a bunch of transactions and deals.”

Any uptick in drilling activity would take months to push up production and wouldn’t come close to replacing the 5 million barrels a day in Saudi Arabia that have been affected in the attack.

A potential price increase would be a lifeline for the U.S. oil industry. Companies have cut hundreds of jobs this year and reduced drilling in order to meet investor demands for profitability. The pain has hit smaller companies hardest and pushed more than two dozen producers into bankruptcy protection this year.

And while shale producers have the theoretical ability to ramp up, the extent to which they might do so is uncertain given tremendous investor pressure to restrain spending. Some have pledged not to boost activity even in the face of rising prices.

Although U.S. crude exports have continued to rise along with production, hitting a record 3.1 million barrels a day in June, a temporary pause in the continuing trade conflict with China could also help lift those numbers, analysts said.

But in the end, the quickest contribution the U.S. could make to relieve market tension would be in trade and sanctions.

Mr. Trump has sought to wield influence over oil markets in a way few other presidents have in recent memory, frequently pressuring Saudi Arabia and other large global producers to cut output to keep prices in check. He even weighed a release of crude from U.S. stockpiles last year at a time when prices were rising quickly.

One of the last major geopolitical events that sent prices soaring was the Iraq war, but the U.S. at the time had far less ability to affect prices. Production had been falling since the 1970s, and prices remained low as the world had abundant supply to meet demand.

Write to Bradley Olson at Bradley.Olson@wsj.com


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