- REUTERS/ Leonhard Foeger
- The price of Brent oil has surged more than 10% after an aerial attack on Saudi Arabia’s oil production slashed global output.
- While the country is working on getting its two refineries back online, it could take weeks before its rate of production is fully restored.
- With “no signs of de-escalation” in the region and the potential for further attacks, there will be sustained upward pressure on oil prices, RBS Capital Market commodity strategist Michael Tran said in a note.
- That may be only further exacerbated by indications that President Trump and Iran are both ready for war.
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The price of oil has skyrocketed by more than 10% after an attack on two major oil refineries in Saudi Arabia over the weekend cut the country’s production in half, wiping 5% off oil output globally.
The price of Brent oil surged from around $60 a barrel to as much as $68 before pulling back slightly following the attack, which targeted the Kingdom’s Abqaiq processing facility, the world’s largest, as well as the country’s second-largest oilfield.
Just how long it will take to fully recover production still remains unclear.
“While Aramco officials have suggested that exports may restart within days, there is a high degree of ambiguity around timing, [the] extent of damage, coordinated supply response measures and the impact on investor sentiment,” RBC Capital Markets commodity strategist Michael Tran said in a note supplied to Business Insider.
However, even if oil production was to recover quickly, oil prices are liable to remain higher for longer, Tran warned.
“At a minimum, the attack is a key reminder that the geopolitical risk premium, which has long been absent, should make a pronounced return back into the market,” he said.
“This is not a one-off event and there are no signs of de-escalation.”
In May, Houthi rebels fired aerial missiles at Saudi Arabia’s East-West pipeline. While the attack did not disrupt the flow of oil from the Kingdom, the attempts “underscore the degree of difficulty in repelling aerial attacks”, according to a separate note.
That’s destined to put a floor under oil prices in the interim, Tran warned, with “additional potential attacks” restricting the ability of Saudi Arabia to draw down its reserves to meet the shortfall.
President Trump took to Twitter to signal the US could respond with force.
Saudi Arabia oil supply was attacked. There is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom as to who they believe was the cause of this attack, and under what terms we would proceed!
— Donald J. Trump (@realDonaldTrump) September 15, 2019
“There is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom as to who they believe was the cause of this attack, and under what terms we would proceed,” Trump said.
It comes after oil prices fell last week on the news that National Security Adviser John Bolton had departed the White House, leading to hopes that tensions with Iran would abate.
“One thing we can say with confidence is that if that part of the reason for last week’s fall in oil and improvement in geopolitical risk sentiment was the news of John Bolton’s sacking… then it is no longer valid,” National Australia Bank head of FX strategy Ray Attrill said in a note.
The currencies of major oil exporters Canada and Norway both rose 0.5% and 0.6% in response, while the Japanese yen, perceived as a safe-haven currency, rose more than 0.3% on the US dollar.
While energy sectors are expected to rally on the news, the broader indices did not seem to be suffering as a result of the attack when the first began opening on Monday.
Australia’s ASX 200 and China’s Shanghai Composite were both trading flat, while Korea’s KOSPI was up almost 0.5% as of 12 am EDT. Japan’s NIKKEI was closed on a public holiday.