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By Jessica Raymond and David Byrns - September 2019
The Sept. 14 strikes on Saudi Arabia’s national oil company, Aramco, damaged the nation’s oil infrastructure, sparking unrest in global oil and financial markets. The company’s crucial Abqaiq oil-processing plant—which processes up to 7% of the world’s oil supply—along with its production facilities at the Khurais oil field, were among the targets.
Yemeni rebels claimed responsibility; U.S. officials say Iran is to blame. Regardless of who is responsible, the actions increase the threat of future attacks and the potential for an escalating conflict. Global oil markets now face considerably greater geopolitical risk.
David Byrns, senior investment analyst, and Jessica Raymond, senior corporate analyst, discuss how this troubling event may affect economies and investors.
Until now, increasing Middle East tensions, including Iran’s seizing of oil tankers in the Strait of Hormuz, have had little effect on global oil prices. Those events didn’t cause any real disruptions to global oil supply. Rather, a skittish outlook for oil demand recently caused oil prices to decline. Also, markets expected U.S. shale and large projects in Norway and Brazil to boost supply, adding to the downward pressure on oil prices.
Damage to Saudi facilities from this strike initially took 5.7 million barrels per day of production offline—the worst-ever sudden halt in oil output. This volume is more than 50% of Saudi crude production and nearly 6% of global supply.
Global oil prices surged as much as 20% on the first trading day after the attack. Looking ahead, we believe the duration of the outages will have the biggest influence on oil prices and energy sector investments. If the Saudi Arabians quickly restore production, the recent price surge likely will be temporary. However, worries about future attacks may keep prices higher. If production is offline for a prolonged time period, oil prices likely will continue to increase.
On Sept. 17, the Saudi Energy Ministry announced the Abqaiq facility resumed processing 2 million barrels per day. Officials expect the country’s output to recover to August levels by the end of September. They expect to restore full productive capacity by the end of November. If Aramco can deliver on this timeline, the market impact should be less severe than feared. Although oil prices decreased after the initial spike, they remain higher than they were before the attack. We expect continued volatility as the market reacts to declining oil stockpiles and reevaluates the risks to energy supply chains.
The attack created a severe supply problem in global crude oil markets. Depending on how long it takes to repair the damage, suppliers may have to tap into inventories and reserves to meet demand. The worst-case scenario is Saudi oil production remains offline for several months. This would lead to higher energy prices for consumers globally and potentially harm economic growth.
If Aramco can repair the damages relatively quickly, the market once again may be grappling with too much oil. Supply increases from U.S. shale and a few large international projects appear set to hit markets in 2020.
Too much available crude oil has hurt energy sector stocks this year. We expected this trend to continue in 2020, but the attack caused us to reevaluate our outlook. If production outages are long-lasting, oil prices likely will increase, giving producers a reason to boost supply. This would be a positive event for energy sector investing.
The situation in Saudi Arabia will determine how energy stocks perform in the near term. In 2021 and beyond, we believe supply growth will slow down enough to affect prices. Energy prices should increase, which should benefit oil companies (and their stocks).
Within fixed income markets, high-yield and investment-grade bonds issued by energy companies have been among the worst-performing bonds this year. But, because of this attack, we expect energy sector bond prices to improve in the near term. In particular, we think bonds issued by oil exploration and production companies will advance more than other energy sector bonds. Still, we’re remaining cautious due to the growing risks to global growth.
Stock prices may appear low, but we’re watching for oil supply and demand to show signs of rebalancing.
COVID-19 continues to spread, and countries are ramping up their responses to protect vulnerable economies. Will their efforts pay off?
Markets may have panicked today, but we think it’s best if investors respond with poise and patience instead.
Senior analysts David Byrns and Jessica Raymond discuss how the September attacks on the Saudi oil industry may affect economies and investors.
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