Market Strategy 9/16/2019
Look for Progress, Not Perfection
Geopolitics, oil, trade negotiations and the FED’s FOMC meeting on the front burner
Key Takeaways
- This week developments tied to the attack on Saudi oil facilities will garner attention but not dominate investor focus with a brace of economic data and the Fed’s FOMC outcome scheduled.
- The drones deployed in the attack underscore the ubiquitous nature of technology and the vulnerability of the global oil supply.
- Last week’s jump in US Treasury yields suggested a recognition by the bond market that it had overbid US safe haven assets.
- Last week’s economic data showed an increase in inflation that suggested the economy is likely growing at a faster pace than previously expected.
Over the weekend news of an attack on Saudi Aramco oil facilities by ten drone vehicles pushed oil prices higher. The price of oil “jumped the most ever” per Bloomberg news after Brent crude spiked more than $11 a barrel as oil began trading in Asia but later pared gains after the markets began to digest the news and its potential impact on global and regional supplies.
The attack cut into Saudi Aramco supplies and was expected to affect 5.7 million barrels or some 5% of the global market in the near term.
The initial jump in the price of oil was reported to be the biggest surge since Brent futures began in 1988 illustrating an appetite for volatility as well as concern.
The attack over the weekend is reportedly the single worst sudden disruption of the oil market from an historical perspective, surpassing the disruption of Kuwaiti and Iraqi petroleum supply when Saddam Hussein invaded Kuwait in August 1990 as well as the loss of Iranian oil output which occurred in 1979 during the Islamic Revolution per data from the US Department of Energy cited by Bloomberg News. Iranian backed Houthi rebels in Yemen claimed credit for the weekend attack.
So-called safe haven assets were bid higher on the news with upticks in prices of gold, the Japanese yen along with the currencies of several commodity-linked countries.
Expectations early on are for Saudi Arabia to reboot at least half or more of the oil production affected in the attack in the days immediately ahead with the balance of production affected taking somewhat longer.
Sovereign stockpiles and emergency oil reserves around the world (including that of the US Strategic Petroleum Reserve) are likely to help offset near-term disruption to supplies.
In our view the attack on Saudi Aramco oil supplies underscores the impact of developments in contemporary technology with “ten drone vehicles” believed to be responsible for the attack having such impact on global supplies.
The events over the weekend also draw attention to just how much things have changed in the global oil patch over the past two decades as reports in the press noted that Saudi Arabia ranked third in oil production in August trailing the US (#1) and Russia (#2) while staying ahead of Canada, Iraq and Iran.
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