A Record-Breaking Day for the Oil Markets
A record-breaking day for the oil markets... Crude surges 15% on new fears of war... Why $75 – or even $100 – oil is now a possibility... What you need to know before you bet on even higher prices now...
Today, it was all about oil...
As you've probably heard by now, Saudi Arabia's oil-production facilities were attacked over the weekend. The coordinated strikes have reportedly disabled nearly 5.7 million barrels per day ("bpd") of oil production. That's more than half of the country's usual daily production... And it amounts to more than 5% of the world's daily output.
So, it's little surprise that crude-oil prices absolutely soared in response. As Bloomberg reported this morning...
Oil surged the most on record after a devastating attack on Saudi Arabia intensified concerns about growing instability in the world's most important crude-producing region...
Saudi Aramco faces weeks or months before most output from its giant Abqaiq crude-processing complex is restored, according to people familiar with matter...
For oil markets, it's the worst sudden supply disruption ever... [It] surpasses the loss of Kuwaiti and Iraqi petroleum output in August 1990, when Saddam Hussein invaded his neighbor. It also exceeds the loss of Iranian oil production in 1979 during the Islamic Revolution, according to the International Energy Agency.
Brent crude oil – the international benchmark for prices – jumped nearly 20% to $71.95 per barrel at the open this morning, its largest move in history. It closed the day up 14.6%... at just more than $69 per barrel.
Here in the U.S., West Texas Intermediate ("WTI") crude oil rose as much as 15% higher to $63.34 per barrel – its biggest one-day jump since December 2008 – before closing the day at $62.90.
This supply disruption could keep a 'bid' under prices in the near term...
Early reports suggest it could take several weeks – or even months – for Saudi Arabia to ramp production back up. According to Goldman Sachs analysts, if the disruption lasts for more than six weeks, tightening global supplies could push Brent crude to $75 per barrel – or roughly 9% higher than it closed at today.
However, the real worry is that this weekend's attacks could lead to further supply disruptions in the region. That's because the U.S. has now officially blamed these attacks on Iran. As the Wall Street Journal reported this afternoon...
American intelligence indicates Iran was the staging ground for a debilitating attack on Saudi Arabia's oil industry, people familiar with the discussions said Monday, as Washington and the kingdom weighed how to respond.
The assessment, which the U.S. hasn't shared publicly, comes as President Trump raised the prospect of a joint U.S.-Saudi retaliatory strike on Iran, a scenario that risks quickly broadening into a regional armed conflict.
As the report noted, this announcement followed a thinly veiled threat of retaliation from U.S. President Donald Trump himself. As Trump "tweeted" last night...
Saudi Arabia oil supply was attacked. 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!
Should a true armed conflict break out, we could easily see oil back above $100 or more.
Given these risks, you may be tempted to chase today's big move higher...
But before you "bet the farm" that oil continues to soar, there are a couple of important points to consider.
First, we'll remind you that Trump recently dismissed national security adviser John Bolton. Bolton has long advocated for a tougher stance on Iran, even suggesting the U.S. should wage a preemptive war to overthrow its government.
His ouster suggests the president may be in favor of a more diplomatic approach. And despite Trump's earlier comments, he is already talking down the likelihood of an immediate response. As financial news network CNBC reported this afternoon...
President Donald Trump said Monday he's in no rush to respond to a coordinated attack that hit Saudi Arabia's oil industry over the weekend...
"It's certainly looking that way at this point," Trump responded to a question on whether Iran was responsible for the attacks. "I don't want war with anybody but we are prepared more than anybody ... We have a lot of options but we are not looking at options right now."
Second, despite the big move higher today, crude prices still remain 'rangebound'...
As you can see in the chart of WTI crude oil below, prices have moved in a range between $50 and $65 per barrel for most of the year...
This price action reflects the conflicting fundamental picture today...
On the one side, you have continued production cuts from the Saudi-led oil cartel OPEC – whose members have stuck to agreed-upon production quotas far longer than they have in the past – acting to push prices higher.
On the other side, you have the continued rise in U.S. shale-oil production – which has now surpassed 12 million barrels per day, making us the world's top oil producer – and a slowing global economy weighing them down.
Until this weekend, it looked like the latter was winning... Crude-oil prices appeared to be rolling over from a series of lower highs.
This weekend's attack could be a 'game-changer'...
If Saudi production is offline longer than expected – or if a larger conflict leads to even further supply disruptions – the supply-demand balance could shift in favor of higher prices.
But we'll also point out that despite today's huge move, oil was so far unable to break out of this recent trading range.
That could change... but until then, caution is warranted. If Saudi production ramps up sooner than feared – or tensions in the region de-escalate once again – crude oil could quickly give up today's gains.
New 52-week highs (as of 9/13/19): Booking Holdings (BKNG), Blackstone (BX), Home Depot (HD), iShares U.S. Aerospace and Defense Fund (ITA), JPMorgan Chase (JPM), Masco (MAS), Flutter Entertainment (PDYPY), Service Corporation International (SCI), and Sysco (SYY).
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Baltimore, Maryland
September 16, 2019