Saudi Drone Attack Rattles Oil Market

Saturday's drone attack on Saudi Arabia's oil facilities has disrupted 5% of the global oil supply and caused prices to skyrocket. The attack, which involved 10 automated drones, wiped about half of the state-owned Saudi Aramco's supply, or 5.7 million barrels a day. It was claimed by Yemen's Houthi rebels, but U.S. officials suspect it originated in Iran.

President Trump has authorized the release of oil from the Strategic Petroleum Reserve and is pushing for approvals of oil pipelines in the country to be expedited. The Strategic Petroleum Reserve consists of 645 million barrels stored thousands of feet underground and was created in 1975 after the Arab Oil Embargo for shocks to the market such as this.

On Sunday night, Trump tweeted, "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!"

Oil prices shot up on concerns of supply and rising geopolitical tensions. On Monday, Brent crude oil futures soared 19%, the biggest percentage jump since 1991's Gulf War, and U.S. West Texas Intermediate rose more than 15%. At 5:37 a.m. EST they were both around 9% higher. Gold and treasuries also climbed.

Bloomberg called it the "the single worst sudden disruption ever for oil markets." S&P Global Platts' global head of market insight Sarah Cottle said the incident "effectively eliminates the world’s spare capacity," according to CNBC. She said, "This heightens the risk premium, it puts a lot of pressure on the supply side." The note said prices are likely to break out of the current $55-65/Bbl options range, to test the high $70s as currently supported by fundamentals. The International Energy Agency said it was monitoring the situation, but markets are "well supplied with ample commercial stocks" for now. RBC Capital Markets called the event a "game changer in the escalating Iranian regional standoff" in a note, according to MarketWatch.

It will take weeks for Saudi Arabia to restore full output capacity, and it can restart a significant volume of the halted oil production within days, sources told Bloomberg.

Winners and Losers

While U.S. futures dipped half a percent lower on Monday, shares in U.S. oil companies like Marathon Oil Corp (MRO), Devon Energy Corp (DVN) were up in pre-market trading. On the other hand, airline stocks like Delta Air Lines Inc (DAL) and American Airlines Group (AAL) were trading 12.9% and 4.8% lower, respectively.

“We are expecting strong performance across the entire energy complex tomorrow, and upstream should see some of the biggest gains as the increase in crude price will immediately flow through to improved cash flow,” said analysts at Houston-based Tudor Pickering Holt & Co in a note reported on by Bloomberg. “Given duration of outage, we suspect equity performance may be short-lived as investors continue to focus on imbalances in 2020 crude fundamentals.”

Saudi Aramco is preparing for an IPO to take place "very soon," and the attack has brought into focus its vulnerability to attacks. It has also been the target of cyber attacks in the past.

World's Largest Exporter

Saudi Arabia produced about 12% of the world's oil last year, according to the U.S. Energy Information Administration, and has 18% of the world's proved oil reserves. It is also the world's largest exporter of oil, but the U.S. may soon take the title thanks to "booming shale production," said a recent IEA report.

The U.S. is the largest consumer of oil in the world, accounting for 20% of total world oil consumption, and Saudi Arabia is its second-largest petroleum source after Canada. However, crude oil exports to the U.S. from Saudi Arabia have been decreasing in recent years after domestic production ramped up in states like Texas and North Dakota. China, on the other hand, has seen its petroleum consumption and imports from Saudi Arabia steadily rise.

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