/Drone Attack Boils Oil Price to Scorch Stock Market Monday

Drone Attack Boils Oil Price to Scorch Stock Market Monday

Saudi Arabia is reeling this weekend after a devastating series of drone attacks in Abqiaq left its oil industry in shock. Houthi rebels from the country of Yemen claimed responsibility for the strikes.

Saudi Arabia has confirmed that half its oil production, roughly five million barrels per day, is currently offline, though they claim they can bring production back online “within days”. Regardless, the effects on the price of oil could be severe. Houthi fighters have previously used drones to strike Saudi Arabian energy infrastructure, but never with this much impact. Roger Diwan, IHS Markit energy consultant said:

“Abqaiq is the heart of the system and they just had a heart attack […] We just don’t know the severity.”

Muted Oil Price Response… For Now

This was a massive attack, with satellites capturing plumes of smoke traveling more than 50 miles. However, some analysts don’t expect pandemonium in the energy markets – at least not yet. Saudi Arabia has more than a month of crude inventories available and will use them to replace lost production. Meanwhile, the global oil market is still oversupplied thanks to new North American shale production.

Richard Mallinson, an Energy Aspects analyst, suggested that Monday’s oil price reaction will be muted. He says this because the market has plenty of oil, meanwhile demand remains weak due to concerns about the global trade war. Still, the oil price could spike, particularly if the Saudis can’t get supply equaling 5% of the global picture back online soon. On top of that, investors now have to consider the possibility of more drone attacks in coming months. Terrorists have tried to attack Abqaiq before – notably in 2006 with vehicles – but drones make it far easier.

How Will Trump Administration React?

At this time, it’s unclear how much state support Iran gave to the Houthi rebels in launching these attacks. Regardless, it is likely to affect the state of U.S.-Iranian relations. The Trump Administration has criticized the Obama Administration for making an agreement with Iran. Meanwhile, former security adviser John Bolton resigned from the Trump Administration last week reportedly in large part due to disagreeing with Trump on Iran policy.

Meanwhile, if oil prices do spike, Trump may open the strategic petroleum reserve to boost supplies in the short-term and keep gasoline and oil prices stable. For now, Trump hasn’t tweeted directly about the incident, though he did call Israel Saturday to discuss a mutual defense treaty.

Monday’s Stock Market Winners And Losers

Last week, investors made a huge sector rotation. They dumped their technology stocks to plow the funds into cyclical Dow Jones companies such as ExxonMobil. This rotation should continue. Geopolitical uncertainty tends to cause investors to buy safe haven plays such as treasury bonds and gold along with bidding up the oil price.

By contrast, the tech and new IPO stocks should continue to sell off. The sector has already been hit with a raft of bad news ranging from weak post-IPO performance from the likes of Slack and SmileDirectClub along with the deepening fiasco over at WeWork. An oil price scare will accelerate selling here, in particular for companies such as Uber that have benefited from cheap gasoline prices recently.

Last modified (UTC): September 15, 2019 10:38 AM

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