Oil prices surged out of the gate to start the new week, as markets reacted to one of the most brazen attacks on Saudi Arabia’s oil infrastructure in history.
Around 50% of the kingdom’s production was affected in Saturday’s drone attacks on Abqaiq and Khurais. On Sunday, sources said it could take “weeks” to fully restore output, but there was some indication that a third of lost production could be back online by the end of the day on Monday. One industry consultant said half of the affected output could be back “as early as tomorrow”. In the meantime, exports will continue “as normal” this week as the kingdom draws on supplies from storage facilities, Reuters said.
Regardless, markets are set to price in a geopolitical risk premium. Brent surged nearly 20%, before paring gains.
The initial spike was the biggest move since 1991.
Trump tried to mute the surge. “Based on the attack on Saudi Arabia, which may have an impact on oil prices, I have authorized the release of oil from the Strategic Petroleum Reserve, if needed, in a to-be-determined amount”, he tweeted, five minutes before trading started.
He said the US would ensure any release would be “sufficient to keep the markets well-supplied”.
Again, though, the issue Trump can’t “fix” is the pricing in of a geopolitical premium that was largely absent from crude. Over the summer, the market was so laser-focused on the macro backdrop (where the trade war stoked fears of demand destruction) that nobody bothered to price the mounting geopolitical tension in the Strait of Hormuz. Now, it’s a different story. Attacks on the heart of the Saudi energy complex cannot be dismissed.
That said, Trump may be successful in blunting the impact, and indeed, USDJPY’s earlier knee-jerk slump reversed a bit after his tweets.
Still, the early reaction across markets says a lot about just how big of a deal this really is. S&P futures dove out of the gate, an indication that until there’s more clarity around how the US plans to respond to purported Iranian aggression, traders will take a “better safe than sorry” approach to headline risk.
WTI jumped nearly 16% in New York. It was the largest move in more than a decade. Like Brent, it trimmed the opening rally.