As expected, the major drone attack on Saudi Arabian oil processing facilities created a significant jump in oil prices when markets opened this morning. The attack has cut SA’s daily output by some 50% which represents a huge 5% of global total daily demand.
Stock prices were also depressed as a result of this attack as well as from data released showing China’s industrial production growth dropping to its weakest pace in 171/2 years in August.
It is worth remembering that the attack in SA does not affect oil extraction, it is the daily supply that is affected. This is important since supply can, in the short term, be maintained at appropriate levels by drawing on the ample market inventories around the globe as well as drawing on the official Strategic Reserves than most countries hold to cover precisely these kinds of events. President Trump has already authorised the use of the US strategic reserves to maintain supply levels. But the effectiveness of using inventories is directly related to the extent of damage to the SA infrastructure and how long it will take to repair and reinstate supplies.
In addition, there are many countries, such as the other OPEC nations and Russia, that are able to increase production levels very quickly if needed.
One strange feature of this attack is the claim by SA that no one was killed in the event. This is really strange in such a huge facility (the largest in the world) where there must surely be at least maintenance and monitoring personnel at all times - this suggests to me that there was actually a warning prior to the strike giving time for an evacuation - that in itself must surely evidence where the attack came from?
However, the key issues here reflect the concerns about what happens next. This cannot be viewed as a single, isolated event. It has increased tensions and demonstrated that such attacks can be, and are being, escalated into international major impacts that affect markets on a large scale. This is clearly the intention of the perpetrators of this particular attack.
So the major questions now are:
- how will the US and other major countries react/retaliate
- how long will it take to restore SA supply
- how vulnerable is the Middle East to further attacks/disruptions
There is little doubt that oil prices will remain higher for some time but whether shortages are sustained enough to cause further increases remains to be seen.
The SP100 shows the drop since Friday (which had actually already turned neutral/negative before the close on Friday).
In addition to all this, this week is also a major week in the UK Brexit saga with Boris Johnson’s meetings in the EU, the court hearings regarding the lawfulness of the UK parliament prorogation and the release of important UK economic data. There are also a number of Central Bank interest rate decisions.
But maybe the most immediate focus is on possible identification of those behind the SA attack and the response/retaliation from the US.