16 Sep

Saudi Aramco Attacks: Crude Oil Shock and Your Stocks

WRITTEN BY Mike Sonnenberg

In a major geopolitical development, two facilities run by Saudi Aramco, the world’s largest crude oil producer, were attacked by Iran-backed Houthi rebels using drones. The drone attack impacted the Abqaiq facility, which is the largest crude oil plant in the world.

Along with Abqaiq, the Khurais facility was also impacted. The attacks disrupted half of Saudi Arabia’s crude oil supply—5 million barrels per day—about 5% of the daily crude oil supply. It may take days to restore the supply. According to S&P Platts, the attacks have also wiped out the glut in the crude oil market.

At 10:23 AM EDT, Brent crude oil was trading up 11.2% at $67 per barrel while West Texas Intermediate (or WTI) crude oil was trading up over 10% at $60.50 per barrel.

Trump administration is “locked and loaded” on Saudi Aramco attacks

Yesterday, President Trump tweeted that the US is “locked and loaded,” but waiting for Riyadh to proceed. This was an apparent reference to Iran. Plus, the Secretary of State, Mike Pompeo, has pinned the attacks on Iran.

Since becoming president, Trump has scrapped former President Obama’s Iran deal. Trump and has maintained a hawkish stance with respect to Iran, including the use of sanctions.

However, there seemed to be a sea change when John Bolton exited as Trump’s National Security Advisor. Just last week, Pompeo discussed the possibility of a meeting between Trump and his Iranian counterpart, Hassan Rouhani, at the UN.

In the best-case scenario, the attacks on the Saudi Aramco facilities cast doubt over the meeting. However, the worst-case scenario could lead to further chaos in the Middle East. In our view, Trump’s comment about waiting for further communication from the Saudis indicates that the second possibility could be more likely.

Energy stocks up, automakers down

As the global crude oil supply glut seems to have vanished overnight, American energy companies have benefited. At 11:38 AM EDT, ExxonMobil (XOM) and Chevron (CVX) were up 1.5% and 2%, respectively. ExxonMobil and Chevron have lagged the S&P 500 Index (SPY) so far in 2019 with 6.5% and 11.7% returns, respectively, until September 13.

During the same timeframe, the S&P 500 Index has given a 20% return. However, the real star of the day is the beaten-down Chesapeake Energy (CHK). CHK stock, which had lost over 15% until Friday, was trading up 11% at 11:45 AM EDT.

On the other hand, legacy automakers were trading deep in the red. As oil becomes more expensive, gasoline-powered vehicles become less desirable. The unexpected spike in crude oil prices could add to GM and Ford’s concerns, as these automakers have seen falling sales year-to-date. Ford and GM’s stocks were trading 0.5% and 3.4%, respectively, at 11:57 AM EDT.

A prolonged rally in oil prices could put further pressure on auto stocks. Escalating geopolitical tensions can also fuel supply-side concerns, pushing auto stocks down.

Time to go electric?

Tension in the Middle East, crude oil supply issues, and the resultant rally in crude oil prices could be a boon for electric vehicle manufacturer. Although Tesla (TSLA) could benefit significantly from that trend, its stock was trading 1.5% lower at 12:02 PM EDT today.

Tesla is on the verge of unveiling a Gigafactory in China to produce the Model 3. As the world’s largest crude oil exporter, China is negatively impacted by a rally in crude oil prices.

Moreover, the weak Chinese yuan exacerbates this situation. So, we may see favorable government policies toward electric vehicles if the crude oil rally persists. Such policies could also help homegrown EV companies such as NIO.

The Saudi Aramco attack and airline stocks

As predicted by my colleague Anirudha Bhagat, major airline stocks are deep in the red today. American Airlines (AAL) was trading 4.6% down at 12:29 PM EDT while United Airlines (UAL) was down 2.92% at the same time.

An unexpected spike in crude oil and, in turn, fuel prices squeeze airlines’ margins. American Airlines and United Airlines’ profit margins soared during the second quarter due to subdued crude oil prices. This trend occurred despite thousands of cancellations due to the Boeing 737 MAZ 8 grounding issue.

Bad timing?

This rally in crude oil prices is driven primarily by supply issues at a time when the American and global economies are perceived to be faltering. The US economy is creating fewer jobs, and the manufacturing sector is in stagnation.

The bond yields, although they have risen from their lows, still don’t point to a healthy economy. The global manufacturing sector is in contraction, and the still-unresolved trade war is still pressuring the economy.

An oil shock at this juncture could be catastrophic. First, it could cripple the already fragile global trade and supply chain. Second, it has the potential to pressure the consumer sector.

With global trade under the siege of protectionism and trade wars, further pressure on consumer confidence due to high fuel prices could hasten the path to a recession. As my colleague Rabindra Samanta noted, consumer cyclicals could be impacted if consumer sentiment turns negative.

Where is the trade war?

The attacks on the Saudi Aramco facilities have taken some attention away from the ongoing trade war. However, China was quick to say that it was irresponsible to blame Iran—or any other country—for the Saudi Aramco attacks without additional information. Iran has denied any involvement in the attacks.

Regardless of the status of the trade war with China, we believe the Saudi attacks could escalate the tensions in the Middle East.

What happens to the world’s biggest IPO in the making?

Saudi Aramco has been planning its IPO for some time. At an indicative $2 trillion valuation, it could easily be the world’s biggest IPO. However, the recent attacks could hamper those plans.

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