Attack against Saudi Arabia results in the biggest sudden disruption of global oil supply ever.
The price of oil saw its biggest intraday jump following attacks on several key Saudi Arabian oil processing facilities.
Over the weekend, Saudi Arabia's pivotal Abqaiq processing facility and Khurais oil field were attacked. In response, oil prices initially spiked by 20% when markets opened. Since then, the price has receded slightly, but prices are still around 10% up from the market’s open.
The attacks have spooked oil markets for several reasons. First, the facilities hit represent a major part of global oil supplies. According to Saudi Arabian officials, the attacks have cut oil production by 5.7 million barrels per day, roughly half of the country’s output and 5% of global supply. This represents the biggest sudden disruption of global oil supply ever.
However, the attacks also make clear the growing geopolitical risks in the region – increasing the so-called risk premium. As Nitesh Shah, director of research at WisdomTree, notes: “The hit to production volume is large. But larger still is the political ramifications.”
Houthi rebels in Yemen have officially taken responsibility for the attack. However, the US has cast doubt on Houthi involvement, instead suggesting that Iran is responsible. If Iran is deemed to be behind the attack, this raises the potential of a military confrontation between it and either Saudi Arabia or the US.
In recent months, Shah notes that the region has seen growing tensions: “Iran had been rattling its sabres via its proxies – undertaking attacks on vessels moving in and around the Strait of Hormuz (the world’s most important oil transit chokepoint) in May and June 2019.
“We believe the geopolitical-premium in oil will rise as the risk of military intervention in the region is growing by the day.”
This increased geopolitical risk can be seen in the jump in the price of both gold and the yen, with both seen as safe havens.
Added to this, the attacks also show how dangerously vulnerable key Saudi oil infrastructure is, especially if military conflict does escalate. As a note from Citigroup says: “There is but one rational takeaway from this weekend’s drone attacks on the kingdom’s infrastructure – that infrastructure is highly vulnerable to attack.”