Shares, Market Event, Commodities

How the markets reacted to the largest oil disruption ever

Ben Weiss, Monday, 16 September 2019

Iran US oil tensions
Source: Planet Labs Inc/CC BY-SA 4.0.  The Khurais Oil Field in 2017.

Brent Crude, the commodity used as a benchmark for all oil, was up 20%, as markets opened late on Sunday evening. This is the highest it has been since mid-May, as the market reacted to drone strikes hitting oil facilities in Abqaiq and Khurais, Saudi Arabia. Where strikes on a couple of bases seem relatively irrelevant, Saudi Arabia contributes 10% of global oil supplies and it has been said that over half of that has been disrupted by the attacks. It also possesses around 18% of oil reserve supplies.

How have markets been affected?

Brent Crude hit a four-month high as traders anticipated a huge disruption to the global supply of oil. Its price had been fairly stagnant in the days leading up to the attack, with one barrel costing around $60. It hit a high over over $71, before falling back slightly to reside around the $64.5 level. A rally has looked to take place though, as it has since risen back towards $68. Operated by state-run Saudi Aramco, the bases are pivotal to world oil supplies.

Oil Crisis Brent Crude


Nymex Crude
has very much mirrored its correlating market. It too rose, but the gains were just shy of 20%. It then experienced a dip before rallying once more.

Oil Crisis Nymex


BP Plc
opened up as well on Monday morning, following a period of extreme volatility. The British company is one of the largest in the world, and the fourth biggest public firm by revenue.

Oil Crisis BP


China Petroleum & Chemical Corporation
is an interesting one to analyse. Despite being the largest oil company (public), the effect of the recent oil crises has arguably been non-existent. Its price opened significantly higher on Monday morning, but this has been a trend of this market for over a week now. Its seen incremental rises each day, so perhaps the fact that China is not definitely involved in these tensions has bode well for the Chinese oil firm.  

Oil Crisis China


Royal Dutch Shell
backs up that theory. It has fluctuated greatly since opening on Monday morning. However, in contrast to Nymex and Brent Crude, it has not seen such volatile swings. After closing at around £22.90, it reopened close to the £23.50 mark on Monday. Rather than a quick downswing, though, Shell’s price has fluctuated around that price and now sits at around £23.30 at the time of writing.

Oil Crisis Shell

Who’s to blame?

Yemen rebel group Houthi has officially taken responsibilityfor the attacks, but it seems they might have had a strong helping hand from elsewhere. Mike Pompeo, US Secretary of State, has implied Iran, supporters of the Yemen rebels and very much against the US, is responsible for the strikes.

Why have the attacks taken place? 

In 2015, Saudi Arabia led a military intervention into Yemen at the request of its ousted leader Abdrabbuh Mansur Hadi. The Houthi, the militant group that removed Hadi from power, were angered by political influence and ties between Yemen, and Saudi Arabia and America. Houthi has been rebelling ever since.

On the other hand, Iran has been heavily blamed by the US. Tensions initially grew a few years back when Iran was allegedly developing nuclear weapons. A 2015 treaty ensured nuclear advancement was stopped and economic sanctions on Iran were in turn lifted, but the conflict was reignited last year as Trump saw a flaw in the agreement.

The President reinstated and relentlessly tightened sanctions, causing huge disruption to Iran’s economy. In retaliation, Iran restarted its nuclear programme. More recently, the US and UK, and Iran have been at loggerheads with one another as both parties have detained opposing oil tankers. The White House believes this attack on US-backed Saudi Arabia is a form of escalating the conflict.

What’s the reaction been?

In typical Trump style, the reaction has been one of resilience. He took to Twitter (where else?) to confirm the US is ‘locked and loaded’ following the attacks and that he believes 'we know the culprit.’

UK Foreign Minister, Dominic Raab, ‘unreservedly condemned’ the attacks and referred to them as a reckless attempt to disrupt global oil supplies.

However, to some it only highlighted the US’ dependency on the Saudis for oil. Journalist Michael Tracey referred to the (failing) goal of ramping up domestic oil production in the US so that it can soon be independent and ‘disengage’ from the Saudi’s affairs.

The Economist Editorial Director, Robert Ward, focussed on the market impact, saying there is ‘not much fat left (for the economy) to absorb external shocks.’

Overall, there is a ominous feeling of worry that a war could soon break out between Iran and the US (and its allies). However, the US is in a strong position on this front. As the world’s largest economy, so many countries are reliant on its trade – Iran is no different. So, the US has a certain leverage already, and its military power will also discourage Iran from engaging directly into combat.

What to look out for?

The immediate impact of the attacks is relatively easy to calculate, and we know they’re devastating. But it’s the long-term effect that will be far more difficult to judge. This mainly depends on how quickly Saudi Aramco can restore production to what is previous state. Depending on how quickly this is done could affect prices for weeks, months or even years to come, so it’s definitely one factor to monitor.

On-going tensions between Yemen, Iran, the US and Saudi Arabia is another aspect that could affect the price of oil markets going forward. The political angle of it will spill over into markets if war, as threatened by Trump, actually does come to fruition – wars cost money!

Whether other countries get involved as well will also be worth tracking. As we saw with China Petroleum & Chemical Corporation’s price, companies in countries not involved in these tensions are perhaps not as reactive to such events specifically, despite it affecting global oil markets in general.

 

 

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