By: Spencer Israel
Saturday’s drone strikes against Saudi Aramco oil facilities in Abqaiq and Khurais has given the oil market a shock the likes of which it hasn’t seen in years, and the ramifications are heavy.
Five percent of the world’s daily oil output has been disrupted, or 5.7 million barrels/day, the biggest disruption in history (and bigger than the 5.6 million b/d disruption during the Iranian Revolution of 1978-79). With half of Saudi Arabia’s oil production offline, oil had its biggest one-day gain since 2008 on Monday, and for a lucky few traders who owned the October $60 call options in WTI futures, their previously worthless contracts were suddenly worth $24 million, per Bloomberg, and the spread between Brent and WTI futures widened by as much as 37%.
Though Saudi officials initially said the lost output would be recovered in a couple of days, it’s now looking like it could take several weeks or longer for production to be fully restored. Whether we end up withdrawing oil from the Strategic Oil Reserve, as President Trump authorized, remains to be seen. There are approximately 1.8 billion barrels held in reserve by governments across the globe, according to Oswald Clint, senior analyst for Bernstein.
Aramco, meanwhile, is considering delaying its long-awaited IPO as they deal with the fallout. Elsewhere, the beaten-down energy sector has suddenly found itself ripping higher. Oil stocks, from Apache to Whiting Petroleum, moved higher across the board, and other assets like gold, bonds, and the Canadian dollar also spiked as a general sense of global uncertainty heightened. Airline and cruise stocks also got hit, as the expected increase in oil costs are likely to have some impact, though the true extent has yet to be seen.
The biggest takeaway right now is that the market needs to account for increased security risk to the oil markets. As Credit Suisse analyst Saul Kavonic put it, “Political-risk premiums are now back on the oil-market agenda.” Mizuho quantified that increased risk as an added $5 per barrel. Goldman Sachs estimated that if oil production remained down for more than six weeks, Brent futures would likely rally to $75 per barrel.
Standard & Poor’s called it back to the U.S. economy, saying “One of the biggest factors playing into our current economic outlook is uncertainty, and along with a heightened level of this, higher oil prices may be just one more nail in the coffin for this current US expansion.”
While it’s too early to tell just how long it will take to recover, we can now add oil to the list of fears this market has. In the meantime, this is just one more thing for the FOMC to address when they meet this week.
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