Publications: Notes at the Margin

No Time for Scenarios; The Diesel Story (September 23, 2019)


Dan Yergin, Bloomberg TV’s favorite oil historian and analyst, and his colleagues at IHS Markit have put forward three scenarios following the attack on the Saudi oil facilities. The first, according to OPIS reporter Steve Cronin[1], assumes the damage can be repaired in a few weeks; the second asserts that more than four weeks will be required for a recovery; the third assumes the recovery will take more than four months. Cronin explains that the third scenario would lead to a very large crude oil price increase.


Reading Cronin’s article, one asks, "So what?" These types of statements help fill dead air on Bloomberg, CNBC, and Fox Business, but they are unhelpful to those managing energy companies, airlines, or governments. Such scenarios offer nothing of value under the current circumstances. Today, one must plan, monitor market developments, and then adjust the plan. The process must be repeated often.


How, though, can this be done in an orderly fashion? What must one watch and what is irrelevant?


The obvious answer is that one must watch everything. The flow of information today is phenomenal. The problem is separating the wheat from the chaff every day if not every hour. At this writing (Thursday afternoon), a tentative picture of the attack’s aftermath is emerging.


First, Saudi Arabia appears to be diverting crude supplies from its own refineries to meet commitments to its customers. This diversion is boosting Saudi demand for products, particularly jet fuel and diesel fuel. The incremental demand will lift global prices of these products.


Second, China’s independent refiners have backed away from buying crude. They can do this because China has doubled its petroleum inventories over the last two years. Unlike crude buyers in past crises, the Chinese have patience, and the patience is helping stabilize markets. The build in China’s stocks may allow the country to refrain from bidding up prices.


Third, the economic slowdown in Europe, China, and possibly the United States will likely depress consumption, reducing upward pressure on prices. However, this relief will come slowly.

[1] Steve Cronin, “IHS Markit Examines Likely Impacts of Saudi Attack,” OPIS, September 17, 2019. For more on the IHS report, see Fotios Katsoulas and Rahul Kapoor, “Crude Oil Trade: What could follow the drone attacks in Saudi Arabia,” IHS Markit, September 16, 2019 [].



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