One Attack? Or the Start of Something Bigger…
I can’t remember a time when the Asian market open was watched so closely.
Yet this morning, I’ll bet a year’s salary most US traders stayed up late into the night to see what would unfold…
And they wouldn’t have been disappointed…
US crude futures soared 15% in the wee hours of Asian trading hours…
And Brent crude futures jumped 13%.
Perhaps these jumps were so big because the Japanese markets were closed today. After all, Japan is a major global market, so without them trading there is a huge reduction on volume.
Or maybe it was because the drone attack on the world’s largest oil processing facility in Saudi Arabia is worse than we realise…
Global disruption to energy source
Sometimes the markets overreact.
Other times the markets overreact, and it’s the rest of us that take a while to cotton on to the unfolding drama.
In this case, I think the markets got it right.
How? Well, for starters there’s an awful lot of soothing sounds coming out of politicians right now.
President Donald Trump is trying to reassure citizens that the US has plenty of oil to handle a disruption.
So much so, he announced that he will authorise the release of the US’ strategic oil reserves.
Same goes here in Australia.
Dr Graeme Bethune, a consultant for EnergyQuest, was wheeled out to reassure the Australian market that the oil supply disruption would be minimal to us.
Telling the Australian Financial Review that only 17% of our oil comes from the Middle East, with the majority coming out of the United Arab Emirates.
Essentially there is an attempt to minimise the panic from both markets and people.
But here’s the thing.
In the wee hours of the Australian morning, Brent crude jumped US$11.73 (AU$17.07) to a high of US$71.95 (AU$104.72).
That’s a 15% jump in the oil price.
To put this leap in perspective, that’s the biggest jump in crude prices since 1988.
Although at the time of writing the price had fallen back to US$68.00 (AU$98) per barrel.
Nonetheless, the markets appear to be ignoring the calming words from political leaders.
However, there is a reason why the markets soared higher at the open today.
This isn’t just a drone attack on an oil field…
…this is a about global disruption to an essential form of energy.
Regardless of who has what stockpiles, there was a deliberate and targeted attack on the world’s largest oil field and refinery.
Meaning this isn’t just contained to the Gulf.
And it could mean there are more attacks to come…
More attacks to come
How does the world’s largest oil field effectively be victim to — in hindsight — a predictable attack?
Tensions regularly flair amongst the Arab states. Drone technology continues to develop quicker than the defence experts can keep up with.
More to the point, the cost of devasting technology is getting cheaper every day. So the ability to create this sort of destruction is becoming easier.
Initially the blame went straight to Iran.
Not long after being accused of doing it, Iran said it wasn’t them, but would be ‘ready for a fully-fledged war’ if they were coping the blame for something that wasn’t their fault.1
Then, it turns out that the attacks are being claimed by Iran-backed Houthi rebels based in Yemen.
CNN reported that a Houthi armed forces spokesperson said the operation was ‘legitimate and natural’ and was a response to ‘the enemy’s aggression and blockade of Yemen’. With the spokesman saying:
‘We promise the Saudi regime that the next operation will be wider and more painful if the blockade and aggression continues.’2
This suggests that there’s more of these cloak-and-dagger attacks to come.
And while I don’t believe we are heading for catastrophic war, threats to the world’s biggest oil field should be taken seriously.
Meaning while the weekend’s attacks are most likely easily overcome, perhaps subsequent ones aren’t.
Saudis reckon they’ll have the oil field up and running within a couple of days.
The biggest impact, however, is yet another delay in the initial public offering of Saudi Arabia’s Saudi Aramco.
The drone attack proves the company is more vulnerable then realised. Security measures will need to be increased. Not only could this attack lower the value of the total IPO, but it could mean there’s less international appetite for a company with lax security measures.
What it means for Aussies
Often problems on the other side of the world, feel just like that. Other side of the world problems.
Especially when we are assured that our supply is unlikely to be disrupted that much.
The problem for us isn’t how long the delays in Saudi oil processing will last, it’s the about the uncertainty that comes with the disruption.
More to the point, just how much the costs increase.
Today one Aussie dollar buys 68.76 US cents.
And while the value of the Aussie is up somewhat in the past couple of months, the bigger trend for our currency is that it is falling in value compared to the US dollar.
In other words, the overall trend of the Aussie dollar is falling. And if crude prices remain high, it’s a double whammy for Aussies.
When the Aussie dollar is weakening, it means the cost of crude will rise much faster for us.
Now, that’s fine for a couple of weeks.
If the oil prices remain elevated for only a week or two, then the flow on effects to Aussies may only last a month.
But if the supply impacts last longer than a month, then the higher crude prices could hit Aussies much harder than expected.
Rising crude prices essentially take money away from consumer spending.
And as I explain here, consumer spending is crucial to keeping the Aussie economy in the black.
Just how hard we are hit though, we won’t know for a few more months.
Until next time,