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Blackwater USA – Daily Brief

Iran

  • Coordinated attacks on key Saudi oil facilities at Abqaiq and Khurais disrupted half of the Kingdom’s oil supply (five million barrels per day), which is ~5% of global supply.
  • Saudi’s oil infrastructure has a lot of redundancies, so officials think production will be back online by tomorrow, but the attacks are significant because they expose significant vulnerabilities in the global oil supply that the market hadn’t previously priced in. An excellent WSJ article about the repercussions of the attacks is pasted below.
  • Though Yemen’s Houthi rebels claimed the strikes, there’s some evidence that they may just be shouldering the blame for Iran (even though everybody knows Iran supplies the Houthis anyway). The Houthis say they’re retaliating for an escalation in Saudi-led bombing in rebel-held parts of Yemen.
  • Initial clues suggest the attacks originated in Iraq—not Yemen, from which previous ones had launched—and regional analysts think they used cruise missiles, rather than armed drones.

Belt & Road

  • The Brazilian state of Minas Gerais signed a $2.2 billion deal with a subsidiary of Chinese mining company Honbridge Holdings to build a massive, 209k-acre tailings “mega-dam” that will be 70 times the size of the Vale dam that collapsed in January.

Israel

  • Pres. Trump tweeted that he and PM Netanyahu discussed a possible mutual defense treaty. He didn’t share a lot of details, but the mere possibility of U.S. defense support is likely to give Netanyahu’s party a boost in elections next week. Netanyahu tweeted back that Israel “has never had a greater friend in the White House.”

Afghanistan

  • Pres. Ghani’s spokesman said Ghani plans to focus on the election for now, and table peace efforts until after it passes. That’s no big surprise, since Ghani doesn’t have much of a mandate to do anything about a peace deal anyway.

Al Qaeda

  • Pres Trump officially confirmed that Osama bin Ladin’s son Hamza was killed in a U.S. operation sometime in the last two years.

DRC

  • Former Congolese health minister Oly Ilunga Kalenga was detained for allegedly mismanaging funds earmarked for fighting the Ebola crisis. (Kalenga is the one who was deposed in July when Pres. Tshisekedi reorganized DRC Ebola response structure.)

Saudi Oil Attack: This Is the Big One (WSJ)

The technological sophistication and audacity of Saturday’s attack will linger over the energy market

Saturday’s attack on a critical Saudi oil facility will almost certainly rock the world energy market in the short term, but it also carries disturbing long-term implications.

Ever since the dual 1970s oil crises, energy security officials have fretted about a deliberate strike on one of the critical choke points of energy production and transport. Sea lanes such as the Strait of Hormuz usually feature in such speculation. The facility in question at Abqaiq is perhaps more critical and vulnerable. The Wall Street Journal reported that five million barrels a day of output, or some 5% of world supply, would be taken offline as a result.

To illustrate the importance of Abqaiq in the oil market’s consciousness, an unsuccessful terrorist attack in 2006 using explosive-laden vehicles sent oil prices more than $2.00 a barrel higher. Saudi Arabia is known to spend billions of dollars annually protecting ports, pipelines and processing facilities, and it is the only major oil producer to maintain some spare output. Yet the nature of the attack, which used drones launched by Iranian-supported Houthi fighters from neighboring Yemen, shows that protecting such facilities may be far more difficult today.

There are countries that even today see their output ebb and flow as a result of militant activity, most notably Nigeria and Libya. Others, such as Venezuela, are in chronic decline due to political turmoil. Such news affects the oil price at the margin but is hardly shocking.

Deliberate attacks by actual military forces have been far rarer, with the exception of the 1980s “Tanker War” involving Iraq, Iran and the vessels of other regional producers such as Kuwait. When Saddam Hussein’s Iraqi forces invaded Kuwait in 1990, removing its production from the market and putting Saudi Arabia’s massive crude output under threat, prices more than doubled over two months.

Yet Saturday’s attack could be more significant than that. Technology from drones to cyberattacks are available to groups like the Houthis, possibly with support from Saudi Arabia’s regional rival Iran. That major energy producer, facing sanctions but still shipping some oil, has both a political and financial incentive to weaken Saudi Arabia. The fact that the actions ostensibly were taken by a nonstate actor, though, limits the response that the U.S. or Saudi Arabia can take. Attempting to further punish Iran is a double-edged sword, given that pinching its main source of revenue, also oil, would further inflame prices.

While the outage may not last long given redundancies in Saudi oil infrastructure, the attack may build in a premium to oil prices that has long been absent due to complacency. Indeed, traders may now need to factor in new risks that threaten to take not hundreds of thousands but millions of barrels off the market at a time. U.S. shale production may have upended the world energy market with nimble output, but the market’s reaction time is several months, not days or weeks, and nowhere near enough to replace several million barrels.

After the smoke clears and markets calm down, the technological sophistication and audacity of Saturday’s attack will linger over the energy market.