Where Oil Could Head after Attacks on Saudi Arabia


Sep. 27 2019, Updated 12:51 p.m. ET

On September 14, drones attacked Saudi Arabia Aramco’s oil-infrastructure in the eastern part of the kingdom. Saudi Arabia’s oil production has fallen by 50%. Oil prices are set to rise after these attacks. The energy sector could outperform the broader market. President Donald Trump might interfere to stop the rise in oil prices. A sudden rise in oil prices could impact US consumer spending.

On September 14, drones attacked Saudi Arabia Aramco’s oil infrastructure. Following the attack, Saudi Arabia’s oil production lowered by around 5.7 MMbpd (million barrels per day). The production shutdown could continue for weeks. A 5% reduction in the global oil supply could be sufficient to boost US crude oil prices near or above $70 level. The last time US crude oil prices closed above the $70 level was on October 16, 2018.

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Lower Saudi Arabia oil production could boost US stock

There is one more good news for integrated energy stocks. The fall in Saudi Arabia oil production could push the Brent-WTI spread higher. Refinery output product prices are benchmarked to stronger Brent crude oil prices. A wider Brent-WTI spread contributes to US refiners’ profits. Because of this, ExxonMobil (XOM) share prices could react to the rise in US crude oil prices. XOM’s both upstream and refinery businesses will be benefited from higher oil prices.

The S&P 500 Index (SPY) will be impacted by a sudden rise in oil prices. Energy stocks constitute 5% of the S&P 500. Moreover, upstream stocks like Chesapeake Energy Corporation (CHK) could be in the focus. CHK operates with a production mix of 31% in the oil price-linked commodities. Also, unlike Saudi Arabian oil, CHK had a higher correlation with US crude oil.

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Why oil prices fell last week

On September 13, West Texas Intermediate (WTI) fell 0.4% and settled at $54.85 per barrel. In the week ending on September 13, US crude active futures fell by 3%. On September 11, the EIA reported a draw of 6.91 MMbbls (million barrels) in US crude oil inventories for the week ending on September 6.

The fall exceeded a Reuters poll by 3.9 MMbbls. However, bullish draw in inventories failed to boost oil prices. John Bolton’s exit might be behind the fall in oil prices. After Bolton’s exit, the US and Iran might resume their diplomatic talks, a bearish development for oil prices. 

Saudi Arabia could derail US-Iran talks

However, the tension between Iran and Saudi Arabia could rise. In the past, Saudi Arabia accused Iran of plotting attacks. US secretary of state Mike Pompeo has held Iran responsible for the recent attacks. This might derail the possible meeting between Donald Trump and Hassan Rouhani at the UN.

US crude oil prices could rise amid heightened geopolitical tensions. In July, oil tankers were attacked near the Strait of Hormuz. However, this supported US crude oil prices. In addition, US crude oil prices rose by 0.2% in July.

Trump’s tweets interfere with oil prices

President Donald Trump is a critic of higher oil prices. In fact, on August 31, he congratulated US citizens for lower gasoline prices. Further, he said that gasoline prices have fallen because of his policies. Since 2018, gasoline active futures have fallen around 12%. Also, in the past, Trump publicly blamed the OPEC for higher oil prices.

However, experts believed that Trump’s statements are more important to oil prices than OPEC’s decision or even Saudi Arabia’s oil production. Also, a possible rise in oil prices could impact US consumer spending. In 2018, gasoline and motor oil constituted 3.4% of average annual expenditures. Stronger consumers are the backbone of the US economy.


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