Summary:
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Oil prices experience largest jump in % terms in nearly 3 decades
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Gains pared as Saudi and US state willingness to offset shock
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Length of outage key to watch going forward
It’s been a dramatic start to the new week for crude markets with international benchmark Brent (Oil on xStation) experiencing the largest spike in percentage terms since Saddam Hussein invaded Kuwait in 1990. Futures contracts were up by almost 20% as trading resumed last night due to an attack on Saudi Arabia’s oil infrastructure over the weekend, which represents a significant supply side shock. Not only has the damage removed more than 5m b/d of Saudi output - the single biggest outage from one incident on record and around 1/20th of global production - but there’s obvious fears this won’t be an isolated incident.
The attack has caused the largest ever disruption in terms of barrels per day (b/d) lost, outstripping the Iranian revolution in 1978-79 and also the Iraqi invasion of Kuwait in 1990-1991. Source: IEA, Bloomberg
Houthis claim responsibility
The attack which the Iranian-backed Houthis group in Yemen have claimed responsibility for, raises questions as to how vulnerable Saudi Arabia is to further attacks going forward and there will likely be a significant geopolitical risk premium in oil prices for the foreseeable future. Risks in the region were seemingly receding after the resignation of well known Iran hawk John Bolton from his role as White House adviser last week, with speculation that this was due to plans from Washington to lift sanctions on Tehran but the attacks have totally changed the narrative on this front.
Impact felt across other asset classes
The shock has caused moves across other asset classes too with the Canadian dollar and Norwegian krone two of the main beneficiaries while large importers of Oil such as Turkey have seen understandable adverse reactions in their currency. Risk sentiment in general has taken a hit with indices gapping lower while bonds and precious metals have experienced some buying with Gold moving back above the $1500/OZ mark once more.
Reserves in place to mitigate the shock
Even though the shock is the largest single incident in history, there’s sizable reserves that could be used to mitigate the initial impact. Saudi Arabia has approximately 188 million barrels of crude in reserve, meaning they can cover the shortfall for roughly 37 days. US president Trump tweeted just before the market opened last night that he is ready to release as much oil as needed from the Strategic Petroleum Reserve (SPR) and with some 640 million barrels there’s an ample amount if needed to try and mitigate the short term shock. This has contributed to some of the initial gains being pared with Brent handing back around half of the spike to trade higher by roughly 7% at the time of writing.
What to watch going forward
The lasting market impact of these attacks will depend to some extent on how quickly the lost production can be put back online. Due to the size and success of the attack a risk premium will likely remain in the oil price for some time going forward as it has no doubt revealed how susceptible the kingdom is to these sort of moves. In the short-term traders will be eagerly watching out for any further updates on the length of the outage, as if it is very short term IE a week or less, then the initial moves may be seen as an overreaction. However, scheduled maintenance of oil production often runs longer than expected and a prolonged outage alongside the perceived increased threat of a further escalation in the Middle East could easily send Oil back above the $70 a barrel mark and potentially even as high as $75. On the downside the gap from last week’s close at 60.25 is an obvious level to have an eye on.
There’s been a huge move higher in the Oil price after the Saudi attacks, although the gains have since been pared back somewhat on hopes that reserves will be tapped to mitigate the impact. While, technicals can be seen to take on a secondary importance after events like these, the long term trend could be seen as having turned higher once more with the market gapping up through the Ichimoku cloud on D1. The 2019 high just below $75 could be revisited if the impact of this is lasting while last week’s closing price of 60.26 will be on the radar of those looking for a gap fill. Source: xStation
