Crude prices surged Sunday evening following an attack on Saudi Arabia’s oil infrastructure and an announcement from President Trump that he has authorized the release of oil from the Strategic Petroleum Reserve.
U.S. oil futures advanced about 11% to $60.98 a barrel, maintaining gains from just after trading opened at 6 p.m. ET. Brent crude, the global gauge of oil prices, soared 13% to $68.13 a barrel. If those moves held, they would mark some of the biggest intraday for crude in years and put oil at its highest level in months. Both gauges surged about 11% in February 2016 when oil was in the midst of a sharp plunge on fears of excess supply, per a Dow Jones Market Data analysis of figures from FactSet.
Analysts cautioned that prices likely will be volatile as trading volumes increase throughout the session and more details emerge about the disruption in Saudi Arabia, where attacks over the weekend knocked out 5.7 million barrels a day of production, or roughly 5% of the globe’s output.
A sustained spike in fuel prices could mark the latest threat to a world economy already under significant pressure from the U.S.-China trade war. It could also impact stocks in the U.S., where resilient consumer spending has helped lift major indexes near records. Higher energy prices can raise gas and heating bills, cutting into available income.
Sunday’s moves followed weeks of listless trading in oil, prompting some analysts to say markets were overlooking the possibility of heightened geopolitical tensions in the Middle East.
“This is what happens when somebody lights the spark,” said
director of the futures division at Mizuho Securities USA. “There’s a lot of crude oil and one of the most geopolitically volatile areas on the planet…. They are the biggest exporting country.”
Shortly before 6 p.m., Mr. Trump said on Twitter he was authorizing the release of crude from the SPR to keep markets well supplied if needed. Such releases have been rare historically and only used as a last resort. The president said the size of the release was yet to be determined. There are more than 600 million barrels in the SPR.
He followed that tweet with others, saying, “There is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom as to who they believe was the cause of this attack, and under what terms we would proceed!”
The attacks targeted Abqaiq, a massive processing plant that is at the heart of Saudi Arabia’s energy system. Analysts say the damage could potentially create a supply shortfall as the kingdom assesses the damage and tries to avoid a sharp drop in exports.
The world’s largest crude exporter could tap oil inventories and use other facilities to process crude, but analysts say the uncertainty created by the attack could lead to significantly higher fuel costs. While the U.S. has grown its shale production, limited export capacity could limit the industry’s ability to respond to a large shortfall.
“This is basically equivalent to taking the entire Permian Basin and having it produce nothing for days,” said
a senior portfolio manager who oversees energy assets at Tortoise Capital Advisors, referring to the prolific U.S. region that spans more than 75,000 square miles of West Texas and New Mexico. “The response here is key and how long it takes to come back.”
Mr. Thummel said he wouldn’t necessarily immediately add to investments in energy stocks first thing Monday given the number of unknowns about the disruption to Saudi output.
“I’d like to see this play out a little more,” he said.
The outsize moves also illustrated the fragility of the oil market, which has increasingly been controlled by passive funds and trend followers as commodity funds focused on supply and demand have closed in recent years. Analysts said funds closing bets that oil prices would fall to limit losses could exacerbate market swings if the surge continues.
Houthi rebels in Yemen backed by Iran claimed responsibility for the attacks, the latest in a series in recent months on Saudi Arabia’s oil infrastructure. A Saudi-led coalition has fought for years to seize control in Yemen from the Houthis, who took control of the country’s capital, San’a, in 2014 during a civil war.
This weekend’s incident stoked ongoing tensions between Iran and the U.S. and its ally Saudi Arabia. The U.S. blamed Iran for the attacks, a claim Tehran denied. U.S. and Saudi officials are also investigating whether they involved cruise missiles fired from Iraq or Iran, The Journal reported.
The uncertainty in the Middle East could force investors to brace for more possible disruptions to output, analysts said. U.S. crude ended last week up 21% for the year at about $55 barrel, though it was well below its April peaks and levels from a year ago on fears that softening demand would result in a supply glut.
Recent declines in fuel prices have been a boon for large users of fuel and consumers who have paid less at the pump. U.S. consumers have continued to spend steadily in recent months, powering the economy despite a trade war between the world’s two largest economies. Consumer spending accounts for more than two-thirds of U.S. growth.
Analysts said more responses from developed nations that could tap their plentiful stockpiles of crude could soften some of the market’s reaction. An inventory response could be necessary because the Organization of the Petroleum Exporting Countries has limited spare capacity, production that can be quickly turned on in an emergency, to handle what could be the industry’s largest disruption in years.
Large buyers of Saudi Arabian oil in Asia such as China, Japan and India could also be impacted depending on how much fuel prices rise on the supply disruption.
“These attacks make it even more difficult to protect these facilities, so there’s a reason why a risk premium is likely to stay over the coming weeks,” said Giovanni Staunovo, a commodity analyst at UBS Wealth Management.
Write to Amrith Ramkumar at email@example.com
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