Commodities
Crude Oil Prices Soar on Drone Attack
Posted onGlobal oil prices surge more than 10% at the open of Asia's trading on Monday after a drone strike on a Saudi Arabian oil facility affected about 5% of global supplies.
Significance of disruption
- Drone attacks over the weekend seriously damage Saudi Arabia’s key oil production facilities. Around half of the country’s oil production and processing has been affected – the worst threat to the Kingdom since the first Persian Gulf War in 1990.
- While well-protected, recent events show it is by no means immune to significant attack and damage.
- Initial losses equate to around 5% of global oil consumption. At the moment, it is unknown how long it will take to restore production.
Initial reactions
- Market views will likely focus on whether the attack on Abqaiq facilities will set off a wider conflict. The US State Department has named Iran as the culprit, while Iran-backed Houthi rebels in Yemen have claimed responsibility for the attack.
- A spike in crude oil prices, drop in global interest rates and likely “risk-off” reaction in global shares prices are expected by Citi analysts in Monday’s trading session.
- Kneejerk bearish Asia FX response is likely. Countries vulnerable to oil price shock in Asia are India, Thailand, Korea, Taiwan and Indonesia. CNY/CNH may also see bearish positions re-emerge.
But perspective is required
- Geopolitical events have a historical tendency of exaggerated initial impact in markets, with a correspondingly smaller impact over time.
- As opposed to temporary disruptions for repairs inside Saudi, the more critical issue would be any degree of any escalation with Iran.
- Citi analysts do not expect an oil price jump proportional to production loses for the following reasons. First, Saudi’s readily available emergency supplies to the market are roughly equal to a month’s supply at a similar pace, while the US’s Strategic Petroleum Reserve is close to four month’s supply.
- Second, while global oil prices are expected to move toward a higher near-term equilibrium, however, with US oil output nearly double its level of a decade ago and net imports dramatically lower, the broad global oil price is well within familiar ranges.
- Takeaway: Economic weakness and international discord in various forms are reasons why Citi’s Global Investment Committee has small overweights in cash and gold. Investors should be cognizant of the risk that mounting economic fears may become overstated, and should see through any near-term market dislocations while remaining carefully balanced in asset allocation.