Over the weekend, an oil field and oil processing facility in Saudi Arabia was attacked by hostile drone technology. The damage knocked out 5.7 million barrels of daily crude production, which is 50% of the kingdom’s oil output and 5% of global production.
After the attack, conflicting reports followed on Saudi Arabia’s ability to restore their oil production. Saudi Aramco, the national oil company, reported they aimed to restore one-third of the lost oil output by Monday, September 16. However, Bloomberg News reported a gloomier estimate: it could take weeks to restore the majority of Aramco’s oil output.
Immediately after the attack, oil prices soared. That prompted Saudi Arabia to cut its oil output in half.
U.S. gasoline futures then surged 12.8%, climbing $0.20 to an average of $1.75 per gallon.
Next, oil prices began dropping from their highs after President Trump announced he was authorizing the release of oil from the Strategic Petroleum Reserve, stating the goal of this move was to keep the markets “well-supplied.”
As you can see, this unforeseen incident has caused much financial volatility around the globe. The oil attack in Saudi Arabia created ripple effects that are spreading out and disrupting other areas of the global economy.
Explosive Ripple Effects on Investments
Let’s begin with the market obviously affected the most by the Middle Eastern proxy war — oil.
Some analysts think oil prices will rise significantly, possibly reaching $70 per barrel or higher. One of those analysts is Chris Midgley, global head of analytics for S&P Global Platts. “The events in Saudi Arabia have ratcheted up tensions in the Middle East to a new level raising concerns about supply security,” he said.
According to S&P Global Platts, Saudi Arabia should be able to maintain supply in the short term by tapping their reserves, but their analysts are looking for any signs that production will be hurt long-term. “Price could move higher if Saudi production is confirmed to be curtailed for a more substantial period which is not our current assumption,” Midgley said.
A more hopeful outlook came from White House Counselor Kellyanne Conway, who said on Fox News Sunday, “The U.S. is ready to tap its Strategic Petroleum Reserve, used only for emergencies, to stabilize supply in the oil market.”
If oil prices cannot be kept down, this will have significant impacts on the economy — in fact, some analysts warn the global economy could tip into a recession.
Saudi Arabia’s stock market dropped 2.3% at Sunday’s open, while the country was still putting out the fires.
After the U.S. stock market closed on Monday, Barron’s reported the Dow dropped 143 points due to aftershock felt from the oil attack.
But not everyone thinks the Saudi oil incident will negatively affect the current bull market. Writer Mark Hulbert explains on the MarketWatch blog why he thinks stock investors have overreacted to the Saudi oil attack. The bottom line of his article?
“Don’t automatically assume that oil’s price hike spells the end of the economic expansion or the bull market. It might actually keep both the economy and the bull running strong.”
Many investors have turned to safe haven investments in the wake of the oil attack.
Spot gold was up 1% at $1,503.10 per ounce on Monday after experiencing a dip of 1.2% in the previous week, as the market reflected a hope that the U.S.-China trade war might be ending soon.
Once again, gold is seen as a safe haven during a time of political and financial uncertainty, including when the dollar and stock markets suffer.
Uncertain Times Ahead
More investors could be turning to gold in the next few months as they keep an eye on the price of oil. If the resulting oil price hike continues on for more than a few months — the global economy could be deeply damaged.
When an oil price spike is caused by a shock to supply, it effectively acts as a tax on consumers of oil, hurting the GDP of countries that are net oil importers.
Economist Holger Schmieding of Germany pointed out an increase of 10 euro per barrel generally adds 0.3% to eurozone consumer price inflation in two months, and this affects consumers’ disposable income.
“For countries that are hovering on the brink of recession already, this could make the difference between stagnation or a mild contraction,” he said, pointing to Germany and Italy.