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Oil jumps the most ever after drone attack cuts Saudi supplies

The unprecedented move in Saudi Arabia reverberated around financial markets.

Bloomberg|
Updated: Sep 16, 2019, 03.43 PM IST
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Oil prices jumps as attack on Saudi facility disrupts output
Oil prices jumps as attack on Saudi facility disrupts output
By Serene Cheong and Dan Murtaugh

Global oil prices surged the most on record after a drone strike on a Saudi Arabian oil facility removed about 5% of global supplies.

In one of the most dramatic oil market opens, Brent futures jumped almost $12 a barrel in the seconds after trading started on Monday, the biggest advance in dollar-terms since they were launched in 1988. On the New York Mercantile Exchange, West Texas Intermediate contracts were frozen for about two minutes after the scale of the move delayed the market open.

State energy producer Saudi Aramco lost about 5.7 million barrels per day of output on Saturday after 10 unmanned aerial vehicles struck the world’s biggest crude-processing facility in Abqaiq and the kingdom’s second-biggest oil field in Khurais.

For oil markets, it’s the single worst sudden disruption ever, surpassing the loss of Kuwaiti and Iraqi petroleum supply in August 1990, when Saddam Hussein invaded his neighbor. It also exceeds the loss of Iranian oil output in 1979 during the Islamic Revolution, according to data from the U.S. Department of Energy.

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“No matter whether it takes Saudi Arabia five days or a lot longer to get oil back into production, there is but one rational takeaway from this weekend’s drone attacks on the Kingdom’s infrastructure -- that infrastructure is highly vulnerable to attack, and the market has been persistently mispricing oil,” Citigroup Inc.’s Ed Morse wrote in a research note.

The unprecedented move in oil reverberated around financial markets. Haven assets including gold, the yen and Treasuries surged on concern over the geopolitical fallout from the attacks. Currencies of commodity-linked nations including the Norwegian krone and the Canadian dollar also advanced. U.S. gasoline futures jumped as much as 13%.

Saudi Arabia can restart a significant volume of the halted oil production within days, but needs weeks to restore full output capacity, people familiar with the matter said. The kingdom -- or its customers -- may use stockpiles to keep oil supplies flowing in the short term. Aramco could consider declaring itself unable to fulfill contracts on some international shipments -- known as force majeure -- if the resumption of full capacity at Abqaiq takes weeks.

That would rattle oil markets and cast a shadow on Aramco’s preparations for what could be the world’s biggest initial public offering. It’s also set to escalate a showdown pitting Saudi Arabia and the U.S. against Iran, which backs proxy groups from Yemen to Syria and Lebanon. Iran-backed Houthi rebels in Yemen claimed credit for the attack, but U.S. Secretary of State Mike Pompeo blamed Iran directly.

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U.S. President Donald Trump authorized the release of oil from the nation’s emergency oil reserves in response to the Saudi supply disruption.

“The vulnerability of Saudi infrastructure to attacks, historically seen as a stable source of crude to the market, is a new paradigm the market will need to deal with,” said Virendra Chauhan, a Singapore-based analyst at industry consultant Energy Aspects Ltd. “At present, it is not known how long crude will be offline for.”

As the oil market opened in early Asian trading, Brent jumped as much as 19.5% on ICE Futures Europe, its biggest gain in percentage terms since 1991. In the following minutes, it pared some of that advance to trade 13% higher at $68.21 a barrel at 7:52 a.m. in Singapore.

Trading in WTI was frozen for a few minutes because of a so-called circuit breaker, which is triggered by a gain of more than 7%. When they finally opened, futures jumped as much as 15.5% to $63.34, the most since 2008.

Also Read

Aramco bought extra gasoline from Reliance Industries after drone attack

India condemns drone attacks on two big oil sites in Saudi Arabia

Saudi Arabia: Drone attacks knocked out half its oil supply

Drone attacks strike major Saudi Aramco facility, oilfield

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