Oil prices rose as much as 20 per cent to above $71.00 a barrel — the biggest percentage spike in almost three decades — as markets reopened after an attack on Saudi Arabia’s oil infrastructure at the weekend cut more than half the country’s production. Financial Times reports in its article Oil prices soar after attacks halve Saudi output that the rally, which followed news that Saudi Arabia’s oil production is expected to be well below maximum capacity for weeks, set oil on course for one of its biggest one-day gains as traders worried over the extent of the outage.
Brent crude oil, the international benchmark, gained almost $12 to trade as high as $71.95 a barrel, before easing back to $66.75 by early afternoon in Asia, still up by almost 11 per cent. The US benchmark, West Texas Intermediate, was up by as much as 16 per cent to $63.64 a barrel before paring back these gains to $60.14 or 9.7 per cent up.
The attack, which the US has said was orchestrated by Iran, has sharply raised geopolitical risks in global energy markets and may reverberate through the wider economy. The short-term fear is about the lack of clarity from Saudi Arabia, the world’s largest oil exporter, over how long it will take to restore output towards the 9.8m barrel a day level of before the attack.
Sentiment sagged in the broader market during Asia-Pacific trading as Hong Kong’s Hang Seng dropped 1.1 per cent and China’s CSI 300 of major Shanghai- and Shenzhen-listed stocks fell 0.3 per cent. The immediate impact on sovereign bonds was limited due to a market holiday in Japan, the regional centre for trading US Treasuries in Asia. But investor unease was reflected in a rally for gold, which climbed 1 per cent to $1,503.29 an ounce.
The loss of more than 5m b/d is the single biggest outage from one incident, and is equal to more than 5 per cent of global supply. Brent’s spike on the open was the largest move in percentage terms since Saddam Hussein invaded Kuwait in 1990.
Jason Gammel at Jefferies said the attack had led to an “unprecedented threat to supply” and it would be the “overwhelming driver of price in the near term”.
In China, the world’s biggest oil importer, oil futures jumped as much as 8 per cent as the country’s statistics bureau reported domestic oil production of just 16.2m metric tonnes in August. That took year-to-date output 1 per cent higher to 127.5m metric tonnes, while oil imports during the same period were up 10 per cent from a year ago at 328m tonnes, according to Financial Times calculations.
“It’s definitely a sharp knee-jerk reaction,” Kerry Craig, markets strategist at JPMorgan Asset Management, said of the price movements. Asian oil importing countries could come under pressure until key questions about oil producers’ ability to smooth out prices were answered: “Until you get that clarity the market’s going to remain nervous,” Mr Craig said.
Iran-backed Houthi militias in Yemen claimed responsibility for the attack on Saturday, saying they used drones to target Saudi Arabia’s oil infrastructure. However, Washington has indicated it suspects the attack may have originated in one of the kingdom’s other neighbours.
Saudi Arabia has been rushing to restore supplies, and has said it will be able to supply oil from storage as well as bring spare production capacity on stream. But sources briefed on the situation said a large percentage of the 5.7m b/d of crude output that went offline on Saturday could be lost for some time.
The attack on Abqaiq, a crude processing centre south-west of Aramco’s headquarters in Dhahran that prepares almost 70 per cent of the kingdom’s crude for export, is of particular concern because the complex facility is vital to crude output. The Khurais oilfield was also targeted.
Traders and analysts warned that even if Saudi Arabia can restore output quicker than currently expected, fears of further attacks — or retaliation by Riyadh or Washington against Iran — could further destabilise global energy markets.
Eurasia Group, a consultancy, said the weekend’s events “will encourage markets to re-examine the need for considering an oil geopolitical risk premium” and said a prolonged outage could lead to a $10 a barrel increase in prices.
A sharp rise in oil prices also comes at a delicate time for the global economy. Fears of a slowdown are percolating and unlikely to be helped by higher energy costs.
The International Energy Agency and the US Department of Energy said they have ample emergency reserves which they could turn to in the event of a prolonged disruption, but analysts said it may not be enough to stop prices spiking first.
Saudi Arabia’s press agency said late on Sunday that Crown Prince Mohammed bin Salman had received a telephone call from his counterpart in Abu Dhabi, who condemned the attack. The statement stressed that Saudi Arabia “has the ability to confront and deal with this terrorist aggression”.
The state news body also said Prince Abdulaziz bin Salman, the kingdom’s energy minister, had inspected the Saudi Aramco plants in Abqaiq this weekend and had held meetings with the chairman and chief executive of the state oil company. It made no comment on the likely length of the production outage.
